Vertical Control Change and Platform Organization under Network Externalities

Arbeitspapier

In this paper, we examine how the introduction of network externalities impact an open and vertically integrated platform's post-merger contractual relationship with third-party sellers distributing through its marketplace. Regardless of whether the platform uses linear contracts or two-part tariffs, we find that, provided these contracts are public, the platform has no incentive to exclude its non-integrated rivals and that the latter's market share rises as network effects gain importance. Vertical integration serves as a commitment device that open platforms can use to convince potential users (e.g., consumers and developers) that their ecosystem will be large and compelling. Interestingly, when the open platform competes with a closed rival, i.e., with a fully integrated ecosystem, it may find it profitable to subsidize independent third-party sellers to strategically steer demand away from the competing ecosystem. These results have novel managerial implications on the incentives of a platform to open up its ecosystem to third-party sellers, as well as for the regulation of vertical integration in the presence of network effect and when different platforms operate alternative business models.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: CESifo Working Paper ; No. 9901

Classification and Topics

• Classification: Wirtschaft ; Firm Organization and Market Structure ; Monopolization; Horizontal Anticompetitive Practices ; Economics of Regulation
• Subject: open ecosystems ; network externalities ; platforms ; vertical integration

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Padilla, Jorge ; Piccolo, Salvatore ; Shekhar, Shiva
• Event: Veröffentlichung
• (who): Center for Economic Studies and ifo Institute (CESifo)
• (where): Munich
• (when): 2022

Further information

• Handle: http://hdl.handle.net/10419/265936
• Last update: 10.03.2025, 11:42 AM CET