Market Power and Mergers in Multi-Sided Markets
57 Pages Posted: 30 May 2017 Last revised: 21 Sep 2018
Date Written: September 10, 2018
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: Suggested Citation