Let the Right 'One' Win: Policy Lessons from the New Economics of Platforms

Abstract

Many of the leading controversies in competition policy in the last two decades, especially those surrounding the Microsoft case, reflect the challenges posed by platform industries. Unfortunately, too often economists and policymakers have drawn the wrong lessons when thinking about such industries. Central to our analysis is a more realistic view of the process of consumer coordination. Platforms often use “usage revenue later” strategies to ensure that consumers coordinate on their platform. This greatly mitigates the possibility of inefficient lock-in or excessive dominance by a leading platform, but it makes inefficient fragmentation a greater danger. Thus regulation, rather than competition policy, may be more appropriate in addressing potential market failures arising in platform industries.

Keywords: platforms, network effects, lock-in, fragmentation, excessive entry, winner-takes-all, heterogeneity

JEL Classification: D42, K21, L12, L43, L51, L86, L96