Vertical Control Change and Platform Organization Under Network Externalities

66 Pages Posted: 1 Oct 2021 Last revised: 3 Aug 2022

See all articles by Jorge Padilla

Jorge Padilla

Compass Lexecon

Salvatore Piccolo

Compass Lexecon

Shiva Shekhar

Compass Lexecon; Tilburg University - Tilburg University School of Economics and Management; Tilburg Law and Economics Center (TILEC)

Multiple version iconThere are 2 versions of this paper

Date Written: September 30, 2021

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.

Keywords: Open Ecosystems, Network Externalities, Platforms, Vertical Integration

JEL Classification: L22, L41, L51

Suggested Citation

Padilla, Jorge and Piccolo, Salvatore and Shekhar, Shiva and Shekhar, Shiva, Vertical Control Change and Platform Organization Under Network Externalities (September 30, 2021). Available at SSRN: https://ssrn.com/abstract=3933646 or http://dx.doi.org/10.2139/ssrn.3933646

Jorge Padilla (Contact Author)

Compass Lexecon ( email )

Paseo de la Castellana 7
Madrid, 28046
Spain

Salvatore Piccolo

Compass Lexecon ( email )

Italy

Shiva Shekhar

Compass Lexecon ( email )

United States

Tilburg University - Tilburg University School of Economics and Management ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Tilburg Law and Economics Center (TILEC) ( email )

Warandelaan 2
Tilburg, 5000 LE
Netherlands

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