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Does a Platform Owning Monopolist Want Competition?

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Author Info
Andras Niedermayer

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Abstract

We consider a software vendor selling both a monopoly platform (e.g. operating system) and an application that runs on this platform. He may face competition by an entrant in the applications market. Consumers are heterogeneous in their preferences for both the platform and the applications. They first buy the platform and then the applications. Their utility over the horizontally differentiated applications is known only after they bought the platform. In equilibrium the platform seller can be better off with a competitor in the applications market for three reasons. First, the platform vendor makes more profits with his platform. Second, the competitor's entry serves as a credible commitment to lower prices for applications. Third, higher ex ante expectations of product diversity lead to a higher demand for his application. Competition may be profit enhancing even if the first two effects are absent, i.e. the product diversity effect can be sufficient. The model also gives an answer to the much debated question why Microsoft prices MS Office significantly higher than its operating system.

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Publisher Info
Paper provided by Universitaet Bern, Departement Volkswirtschaft in its series Diskussionsschriften with number dp0517.

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Date of creation: Dec 2005
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Handle: RePEc:ube:dpvwib:dp0517

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Related research
Keywords: Two-sided markets; platforms; entry; complementary goods; price commitment; product diversity; Microsoft;

Find related papers by JEL classification:
D41 - Microeconomics - - Market Structure and Pricing - - - Perfect Competition
D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection
L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
L86 - Industrial Organization - - Industry Studies: Services - - - Information and Internet Services; Computer Software

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Nicholas Economides & Brian Viard, 2004. "Pricing of Complementary Goods and Network Effects," Industrial Organization 0407005, EconWPA. [Downloadable!]
    Other versions:
  2. Rochet, Jean-Charles & Tirole, Jean, 2003. "Platform Competition in Two-Sided Markets," IDEI Working Papers 152, Institut d'Économie Industrielle (IDEI), Toulouse. [Downloadable!]
    Other versions:
  3. Caillaud, Bernard & Jullien, Bruno, 2003. " Chicken & Egg: Competition among Intermediation Service Providers," RAND Journal of Economics, The RAND Corporation, vol. 34(2), pages 309-28, Summer.
  4. Volker Nocke & Martin Peitz & Konrad Stahl, 2004. "Platform Ownership," PIER Working Paper Archive 04-029, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania. [Downloadable!]
    Other versions:
  5. David S. Evans & Andrei Hagiu & Richard Schmalensee, 2004. "A Survey Of The Economic Role Of Software Platforms In Computer - Based Industries," Discussion papers 04032, Research Institute of Economy, Trade and Industry (RIETI). [Downloadable!]
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  6. Farrell, Joseph & Gallini, Nancy T, 1988. "Second-Sourcing as a Commitment: Monopoly Incentives to Attract Competition," The Quarterly Journal of Economics, MIT Press, vol. 103(4), pages 673-94, November. [Downloadable!] (restricted)
    Other versions:
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