Abstract

http://ssrn.com/abstract=1702632
 
 

References (11)



 


 



Product Differentiation Through Exclusivity: Is There a One-Market-Power-Rent Theorem?


Benjamin E. Hermalin


University of California, Berkeley

Michael L. Katz


University of California, Berkeley - Economic Analysis & Policy Group

November 2, 2010


Abstract:     
In systems industries, combinations of components are consumed together to generate user benefits. Arrangements among component providers sometimes limit consumers’ ability to mix and match components, and such exclusive arrangements have been highly controversial. We examine the competitive and welfare effects of exclusive arrangements among system components in a model of relatively differentiated applications that run on relatively undifferentiated platforms. For a given set of components and prices, exclusive arrangements reduce consumer welfare by limiting consumer choice and raising equilibrium prices. In some cases, however, exclusivity raises consumer welfare by increasing the equilibrium number of platforms, which leads to lower prices relative to the monopoly outcome that would prevail absent exclusivity. We also show that there is no “One-Market-Power-Rent Theorem.” That is to say, exclusive deals with providers of differentiated applications can raise platforms’ margins without reducing application margins, so that overall industry profits rise.

Number of Pages in PDF File: 38

Keywords: Exclusive Contracts, Systems Competition, One-Monopoly-Rent Theorem

JEL Classification: L13, L14, L40

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Date posted: November 4, 2010 ; Last revised: December 22, 2010

Suggested Citation

Hermalin, Benjamin E. and Katz, Michael L., Product Differentiation Through Exclusivity: Is There a One-Market-Power-Rent Theorem? (November 2, 2010). Available at SSRN: http://ssrn.com/abstract=1702632 or http://dx.doi.org/10.2139/ssrn.1702632

Contact Information

Benjamin E. Hermalin (Contact Author)
University of California, Berkeley ( email )
545 Student Services Building
Berkeley, CA 94720
United States
510-642-7575 (Phone)
510-643-1420 (Fax)
Michael Louis Katz
University of California, Berkeley - Economic Analysis & Policy Group ( email )
Berkeley, CA 94720
United States
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