Usage Lock-In and Platform Competition

Abstract

This article studies platform competition where consumers must choose a single platform to complete a bundle of transactions with sellers rather than for each transaction, which is called as usage lock-in. Usage lock-in induces excessive platform competition by allowing platforms to extract the sellers’ transaction surplus and increasing the platforms' incentive to attract usage. Consequently, usage lock-in benefits consumers, hurts sellers, and often benefits platforms. In the long run, usage lock-in may even hurt consumers by discouraging seller investments. These results provide a rationale for policy intervention in response to platform strategies that benefit consumers at the expense of sellers.

Keywords: Two-sided markets, multihoming, competition-in-utility, excessive competition

JEL Classification: L13, L81