Applications Barrier to Entry and Exclusive Vertical Contracts in Platform Markets

18 Pages Posted: 19 Apr 2012  

James E. Prieger

Pepperdine University - School of Public Policy

Wei‐Min Hu

National Chengchi University (NCCU)

Date Written: April 2012

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 an applications barrier to entry. Exclusive contracts in vertical relationships between the platform provider and software supplier can heighten entry barriers. We test these theories in the home video game market. We find that indirect network effects from software on hardware demand are present, and that exclusivity takes market share from rivals, but only when most games are nonexclusive. The marginal exclusive game contributes virtually nothing to console demand. Thus, allowing exclusive vertical contracts in platform markets need not lead to domination 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.

JEL Classification: L42, L63, D12

Suggested Citation

Prieger, James E. and Hu, Wei‐Min, Applications Barrier to Entry and Exclusive Vertical Contracts in Platform Markets (April 2012). Economic Inquiry, Vol. 50, Issue 2, pp. 435-452, 2012. Available at SSRN: https://ssrn.com/abstract=2042372 or http://dx.doi.org/10.1111/j.1465-7295.2010.00355.x

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

National Chengchi University (NCCU) ( email )

No. 64, Chih-Nan Road
Section 2
Wenshan, Taipei, 11623
Taiwan

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