Working Paper: CEPR ID: DP16545
Authors: Jerome Pouyet; Thomas Tregouet
Abstract: We analyze vertical integration between platforms providing operating systems to manufacturers of devices in presence of indirect network effects between buyers of devices and developers of applications. Vertical integration creates market power over non-integrated manufacturers and application developers. That market power provides the merged entity with the ability to coordinate pricing decisions across both sides of the market, which allows to better internalize network effects. Vertical integration does not systematically lead to foreclosure and can benefit all parties, even in the absence of efficiency gains. Its competitive impact depends on the strength and the structure of indirect network effects.
Keywords: vertical integration; platform markets; network effects; foreclosure
JEL Codes: L40; L10; D43
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Vertical Integration (L22) | Market Power (L11) |
| Market Power (L11) | Pricing Decisions (D49) |
| Pricing Decisions (D49) | Buyer and Developer Surplus (D46) |
| Vertical Integration (L22) | Pricing Decisions (D49) |
| Vertical Integration (L22) | Welfare (I38) |
| Strength of Network Effects (D85) | Impact of Vertical Integration (L22) |