Applications Barriers to Entry and Exclusive Vertical Contracts in Platform Markets

39 Pages Posted: 28 Dec 2007  

James E. Prieger

Pepperdine University - School of Public Policy

Wei-Min Hu

Peking University - Shenzhen Graduate School of Business

Date Written: November 2007

Abstract

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 applications barriers to entry. Theory suggests that exclusive contracts in vertical relationships between the platform provider and software supplier can heighten the entry barriers. We test these theories in the home video game market. We measure the impact on hardware demand of the indirect network effects from software. We find that although network effects are present, the marginal exclusive game contributes virtually nothing to console demand. Thus, allowing exclusive vertical contracts in platform markets need not lead to a market structure dominated 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.

Suggested Citation

Prieger, James E. and Hu, Wei-Min, Applications Barriers to Entry and Exclusive Vertical Contracts in Platform Markets (November 2007). NET Institute Working Paper No. 07-46. Available at SSRN: https://ssrn.com/abstract=1078628 or http://dx.doi.org/10.2139/ssrn.1078628

James E. Prieger (Contact Author)

Pepperdine University - School of Public Policy ( email )

24255 Pacific Coast Highway
Malibu, CA 90263
United States
3105067150 (Phone)
3105067494 (Fax)

HOME PAGE: http://sites.google.com/a/pepperdine.edu/jprieger/

Wei-Min Hu

Peking University - Shenzhen Graduate School of Business ( email )

University Town
Nanshan District
Shenzhen, 518055
China

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