Multimarket Contact and Platform Competition: Reassessing the Mutual Forbearance Hypothesis

Abstract

Antitrust authorities are particularly concerned with the dominant market position of tech giants such as Google, Facebook, and Amazon. These digital conglomerates are characterized by platform-based business models and multimarket contact (MMC). They are indeed competing over an overlapping set of users (advertisers, third party sellers, developers, consumers, etc.) and markets. In traditional one-sided markets, theory and empirical evidence show that MMC tends to relax competition. However, it is unclear whether this result holds true in the case of platform competition. This paper examines how MMC affects the pricing behavior and profit of two-sided platforms. We develop a model of platform competition with two distinct markets. We argue that multimarket platforms also generate cross-market externalities that favor their users, in addition to conventional cross-group externalities. Based on a widely used pricing model, we first assume that platforms only charge one group of users and provide free access to the other group. In this context, we find that when cross-market externalities benefit the side that has free access, price competition is fiercer and total welfare increases under MMC. However, when they benefit the side that pays to access the platform, the same result only holds if cross-group externalities and/or cross-market externalities are sufficiently high. Second, we allow platforms to charge both sides. Here, we show that MMC always decrease the profitability of platforms regardless of the nature of cross-market externalities. Our findings contrast with the mutual forbearance hypothesis which claims that MMC relaxes competition in traditional (one-sided) industries. From a competition policy perspective, our paper provides an insight into how antitrust authorities should review conglomerate mergers and assess the effects of the diversification strategies of digital platforms.

Keywords: two-sided markets, platform competition, multimarket contact, cross-market exter- nalities, competition policy, digital markets

JEL Classification: D43, L13, L41, L86