Vertical Integration and Exclusivity in Platform and Two-Sided Markets

Abstract

This paper measures the impact of vertically integrated and exclusive software on industry structure and welfare in the sixth-generation of the U.S. videogame industry (2000-2005). I specify and estimate a dynamic model of both consumer demand for hardware and software products, and software demand for hardware platforms. I use estimates to simulate market outcomes had platforms been unable to own or contract exclusively with software. Driven by increased software compatibility, hardware and software sales would have increased by 7% and 58% and consumer welfare by $1.5B. Gains would be realized only by the incumbent, suggesting exclusivity favored the entrant platforms.

Keywords: platform competition, two-sided markets, vertical integration, exclusive contracting, dynamic demand, estimation of network e

JEL Classification: C61, L13, L14, L42, L86