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

38 Pages Posted: 4 Nov 2010 Last revised: 22 Dec 2010

Benjamin E. Hermalin

University of California, Berkeley

Michael L. Katz

University of California, Berkeley - Economic Analysis & Policy Group

Multiple version iconThere are 2 versions of this paper

Date Written: 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.

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

JEL Classification: L13, L14, L40

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: https://ssrn.com/abstract=1702632 or http://dx.doi.org/10.2139/ssrn.1702632

Benjamin E. Hermalin (Contact Author)

University of California, Berkeley ( email )

545 Student Services Building, #1900
2220 Piedmont Avenue
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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