Does a Platform Monopolist Want Competition?
University of Bern Economics Discussion Paper No. 06-04
35 Pages Posted: 29 Mar 2006
Date Written: December 6, 2006
We consider a software vendor first selling a monopoly platform and then an application running on this platform. He may face competition by an entrant in the applications market. The platform monopolist can benefit from competition for three reasons. First, his profits from the platform increase. Second, competition serves as a credible commitment to lower prices for applications. Third, higher expected product diversity may lead to higher demand for his application. Results carry over to non-software platforms and, partially, to upstream and downstream firms. The model also explains why Microsoft Office is priced significantly higher than Microsoft's operating system.
Keywords: Platforms, entry, complementary goods, price commitment, product diversity, Microsoft, vertical integration, two-sided markets
JEL Classification: D41, D43, L13, L86
Suggested Citation: Suggested Citation