Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/265936 
Year of Publication: 
2022
Series/Report no.: 
CESifo Working Paper No. 9901
Publisher: 
Center for Economic Studies and ifo Institute (CESifo), Munich
Abstract: 
In this paper, we examine how the introduction of network externalities impact an open and vertically integrated platform's post-merger contractual relationship with third-party sellers distributing through its marketplace. Regardless of whether the platform uses linear contracts or two-part tariffs, we find that, provided these contracts are public, the platform has no incentive to exclude its non-integrated rivals and that the latter's market share rises as network effects gain importance. Vertical integration serves as a commitment device that open platforms can use to convince potential users (e.g., consumers and developers) that their ecosystem will be large and compelling. Interestingly, when the open platform competes with a closed rival, i.e., with a fully integrated ecosystem, it may find it profitable to subsidize independent third-party sellers to strategically steer demand away from the competing ecosystem. These results have novel managerial implications on the incentives of a platform to open up its ecosystem to third-party sellers, as well as for the regulation of vertical integration in the presence of network effect and when different platforms operate alternative business models.
Subjects: 
open ecosystems
network externalities
platforms
vertical integration
JEL: 
L22
L41
L51
Document Type: 
Working Paper
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