Market Power and Mergers in Multi-Sided Markets

57 Pages Posted: 30 May 2017 Last revised: 21 Sep 2018

Date Written: September 10, 2018

Abstract

Due to the presence of network externalities in multi-sided markets, evaluating the performance of a platform is more difficult than for a firm in a traditional market. In this paper I develop methods for determining platform marginal costs, market power, and post-merger price predictions. I show that with positive network externalities, traditional methods will underestimate unobserved marginal costs and will overstate both platform market power and post-merger pricing predictions. I also find that if a multi-platform seller partially integrates their networks, by allowing network compatibility across its multiple platforms or through backward compatibility with a previous generation, then a cannibalization effect can occur where some (potentially all) prices decrease relative to their unintegrated counterpart. Finally, I highlight the main results in an illustration on the video game market.

Keywords: Two-sided markets, platforms, price-cost markups, competition policy, video games, network effects, externalities.

JEL Classification: L11, L14, L40

Suggested Citation

Tremblay, Mark, Market Power and Mergers in Multi-Sided Markets (September 10, 2018). Available at SSRN: https://ssrn.com/abstract=2972701 or http://dx.doi.org/10.2139/ssrn.2972701

Mark Tremblay (Contact Author)

Miami University ( email )

208 Laws Hall
Oxford, OH 45056
United States

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