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APPLICATIONS BARRIER TO ENTRY AND EXCLUSIVE VERTICAL CONTRACTS IN PLATFORM MARKETS
Author(s) -
PRIEGER JAMES E.,
HU WEIMIN
Publication year - 2012
Publication title -
economic inquiry
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.823
H-Index - 72
eISSN - 1465-7295
pISSN - 0095-2583
DOI - 10.1111/j.1465-7295.2010.00355.x
Subject(s) - market power , revenue , bargaining power , industrial organization , economics , microeconomics , software , vertical integration , business , computer science , finance , monopoly , programming language
Our study extends the empirical literature on whether vertical restraints are anticompetitive. We focus on exclusive contracting in platform markets, which feature indirect network effects and thus are susceptible to an applications barrier to entry. Exclusive contracts in vertical relationships between the platform provider and software supplier can heighten entry barriers. We test these theories in the home video game market. We find that indirect network effects from software on hardware demand are present, and that exclusivity takes market share from rivals, but only when most games are nonexclusive. The marginal exclusive game contributes virtually nothing to console demand. Thus, allowing exclusive vertical contracts in platform markets need not lead to domination by one system protected by a hedge of complementary software. Our investigation suggests that bargaining power enjoyed by the best software providers and the skewed distribution of game revenue prevents the foreclosure of rivals through exclusive contracting. ( JEL L42, L63, D12)