Exclusive Licensing in Complementary Network Industries

Abstract

This paper develops and analyzes a model of competition between platforms in an industry with indirect network effects, with a specific focus on complementary product exclusivity. The objective is to understand the conditions under which complement exclusivity can be observed and analyze the impact of exclusivity on industry outcomes. We find that the stage of platform market maturity and the asymmetry between the installed bases of platforms are critical determinants of exclusivity. Exclusivity is much more likely in the nascent stages of the platform market, but sometimes results in the very mature stages as well. Non-exclusivity is the most likely outcome in the intermediate stages. In the nascent stages, the bigger platform secures exclusivity, while in the mature stages, surprisingly there exist conditions under which the smaller platform is able to secure exclusivity. The stage of the platform market maturity also has a critical impact on the division of surplus between platforms and complement developers. With exclusive contracting, high quality complements that have a strong impact on consumer's platform adoption decisions often become competitive necessities and appropriate most of the surplus generated.

Keywords: Exclusivity, Complements, Network Effects, Competition, Platforms