Working Paper: CEPR ID: DP17681
Authors: Jerome Pouyet; Thomas Tregouet
Abstract: We analyze vertical integration between platforms providing operating systems to manufacturers of devices when there are indirect network effects between buyers of devices and developers of applications. Vertical integration creates market power over developers, and over non-integrated manufacturers but only under certain circumstances. That market power enables to coordinate pricing decisions across both sides of the market, which leads to a better internalization of 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) |
| Vertical Integration (L22) | Pricing Decisions (D49) |
| Vertical Integration (L22) | Welfare Outcomes (I38) |
| Vertical Integration (L22) | Internalization of Indirect Network Effects (D85) |
| Strong Indirect Network Effects (D85) | Better Internalization of Pricing Structure (D49) |
| Vertical Integration (with Strong Indirect Network Effects) (L14) | Increased Surplus for Buyers and Developers (R31) |
| Weak or Balanced Network Effects (D85) | Adverse Effects on Buyer and Developer Welfare (D69) |
| Vertical Integration (L22) | Pro-competitive and Anti-competitive Effects (L41) |