Restraints on Platform Differentiation

Abstract

The most pressing debates in antitrust today center on major platforms like Amazon, Google, and Facebook. Platform markets are subject to strong network effects, which tend to create barriers to entry and reinforce market power. Frequently, the only way for a new platform to enter the market successfully is to differentiate itself from the leading incumbent in some way—often by offering exclusive content or features. However, recently some dominant platforms have attempted to prevent this by entering into a novel type of “most favored nation” (MFN) agreement with trading partners. Unlike traditional MFNs, which restrain pricing, these MFNs prohibit trading partners from offering any exclusive content, features, or other services to smaller platforms.

These new MFNs are the subject of numerous ongoing lawsuits and regulatory probes involving major platforms, including Amazon. But they have not previously been examined in academic research. This article evaluates the novel antitrust issues they raise. The primary concern is that these MFNs may allow a dominant platform to forestall competitive entry by restraining the ability of new platforms to differentiate themselves. This is consistent with research in economics indicating that exclusive dealing can help to facilitate entry in network industries. I discuss some key differences between these restraints and traditional price-based MFNs, and I identify some key errors in recent judicial decisions evaluating them.

Keywords: Antitrust, platforms, digital markets, exclusion, market entry, product differentiation, most favored nation, MFN

JEL Classification: L40, L41, L42, K21, K00