Internet Infrastructure and Competition in Digital Markets

Abstract

Large platform companies increasingly integrate vertically by building Internet infrastructure. These proprietary infrastructures confer cost and quality advantages in digital platform markets. I model competing investment incentives for an upstream player and a vertically integrated platform facing rival platforms without proprietary infrastructure. Investment incentives increase discontinuously both for the upstream player and the vertically integrated platform when the latter has the larger infrastructure. The upstream player benefits from "commoditization" when it has the smaller network. The resulting increase in investment is socially efficient but decreases the market share of fringe players and reduces contestability, a key objective in European competition policy for digital markets.

Keywords: platforms, vertical integration, multi-sided markets, competition policy, net neutrality, Internet, Internet infrastructure, tiered service, commoditization

JEL Classification: L13, L42, L51, L63, L86