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Discussion Paper Details

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Title: Vertical Mergers in Platform Markets

Author(s): Jérôme Pouyet and Thomas Trégouët

Publication Date: December 2016

Keyword(s): foreclosure, network effects, Two-sided markets and vertical integration

Programme Area(s): Industrial Organization

Abstract: We analyze the competitive impact of vertical integration between a platform and a manufacturer when platforms provide operating systems for devices sold by manufacturers to customers, and, customers care about the applications developed for the operating systems. Two-sided network effects between customers and developers create strategic substitutability between manufacturers' prices. When it brings efficiency gains, vertical integration increases consumer surplus, is not profitable when network effects are strong, and, benefits the non-integrated manufacturer. When developers bear a cost to make their applications available on a platform, manufacturers boost the participation of developers by affiliating with the same platform. This creates some market power for the integrated firm and vertical integration then harms consumers, is always profitable, and, leads to foreclosure. Introducing developer fees highlights that not only the level, but also the structure of indirect network effects matter for the competitive analysis.

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Bibliographic Reference

Pouyet, J and Trégouët, T. 2016. 'Vertical Mergers in Platform Markets'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=11703