Innovation, Rent Extraction, and Integration in Systems Markets

Farrell, Joseph; Katz, Michael B.

doi:10.2139/ssrn.506282

Cited by 35 publications

(41 citation statements)

References 8 publications

(6 reference statements)

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“…First-party content is common in such platform industries, like game consoles offering games, operating systems producing software applications, and e-commerce sites supplying goods [79][80][81]. When a platform ecosystem is well established, platform owners usually have the momentum to generate revenue by imitating successful complementary products or by improving the platforms' overall quality in targeting poor-performing complementary parties [82,83]. For example, Amazon chooses a follower strategy by providing popular or high-rated products on its own.…”

Section: Integrationmentioning

confidence: 99%

Unraveling Platform Strategies: A Review from an Organizational Ambidexterity Perspective

et al. 2017

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Abstract:Platform strategies, which highlight the interdependence in and evolution of business ecosystems, are increasingly relevant for sustainable business models in the digital era. So far, platform research has existed as a fragmented body of insights from different fields, but an integrated theoretical perspective can lead to a more coherent understanding of the research overall. Organizational ambidexterity emphasizes the balance between exploration and exploitation, which is particularly conducive to understanding the sustainability of a firm. Using an organizational ambidexterity perspective, the authors analyze five platform strategies: pricing, openness, integration, differentiation, and envelopment. This paper provides a systematic review of the theoretical and empirical studies in leading management, economics, and information systems journals from 2000 to 2016. The findings show that platform strategies can help platform owners achieve ambidexterity by domain, temporal, and organizational separation. Finally, this paper proposes an agenda for future research.

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“…Matutes and Regibeau (1988) and Economides (1989) study the incentives of firms offering such systems to make their systems compatible. Farrell and Katz (2000) show that the integration of a monopolist into a competitive complementary market may weaken the innovation incentives of independent firms. Complementary components are typically assumed to be symmetric in the systems literature.…”

Section: Related Literaturementioning

confidence: 98%

Two-Sided Competition of Proprietary vs. Open Source Technology Platforms and the Implications for the Software Industry

Economides

Katsamakas

2005

SSRN Journal

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T echnology platforms, such as Microsoft Windows, are the hubs of technology industries. We develop a framework to characterize the optimal two-sided pricing strategy of a platform firm; that is, the pricing strategy toward the direct users of the platform as well as toward firms offering applications that are complementary to the platform. We compare industry structures based on a proprietary platform (such as Windows) with those based on an open source platform (such as Linux), and analyze the structure of competition and industry implications in terms of pricing, sales, profitability, and social welfare. We find that, when the platform is proprietary, the equilibrium prices for the platform, the applications, and the platform access fee for applications may be below marginal cost, and we characterize demand conditions that lead to this. The proprietary applications sector of an industry based on an open source platform may be more profitable than the total profits of a proprietary platform industry. When users have a strong preference for application variety, the total profits of the proprietary industry are larger than the total profits of an industry based on an open source platform. The variety of applications is larger when the platform is open source. When a system based on an open source platform with an independent proprietary application competes with a proprietary system, the proprietary system is likely to dominate the open source platform industry both in terms of market share and profitability. This may explain the dominance of Microsoft in the market for PC operating systems.

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“…Furthermore, tying can be employed to maintain or enhance market power in market A, for instance, by preventing entry into market A (Whinston 1990;Carlton/Waldman 2002). Additionally, negative welfare effects might result from the effects of tying strategies on innovation (Farrell/Katz 2000;Choi/Stefanadis 2001;Choi 2004). Under the aforementioned assumptions, bundling strategies, on the one hand, might lead to relaxing price competition through segmenting the market with competitive pressure, creating niches of monopoly (Carbajo et al 1990;Seidmann 1990;Chen 1997).…”

Section: The Economics Of Conglomerate Mergersmentioning

confidence: 99%

The Prohibition of the Proposed Springer-Prosiebensat.1-Merger: How Much Economics in German Merger Control?

Budzinski

Wacker

2007

SSRN Journal

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Abstract: We review the Bundeskartellamt (Federal Cartel Office Germany) decision on the proposed merger between Springer and ProSiebenSat.1 from an economic point of view. In doing so, it is not our goal to analyse whether the controversial decision by the Bundeskartellamt has been correct or flawed from a legal point of view. Instead, we analyse whether the economic reasoning in the decision document reflects state-of-the-art economic theory on conglomerate mergers. Regarding such types of mergers, anticompetitive effects either do not occur regularly or are more often than not overcompensated by efficiency gains, so that a standard welfare perspective demands reluctance concerning antitrust interventions. This is particularly true if two-sided markets, like media markets, are involved. However, anticompetitive conglomerate mergers are not impossible, in particular in neighbouring markets where there is some relationship between the products of the merging companies. In line with the more-economic approach in European merger control, a particular thorough line of argumentation, backed with particularly convincing economic evidence, is necessary to justify a prohibition of a conglomerate merger from an economic point of view. Against this background, we do not find the reasoning of the Bundeskartellamt entirely convincing and sufficiently strong to justify a prohibition of the proposed combination from an economic perspective. The reasons are that (i) the Bundeskartellamt fails to continuously consider consumer and customer welfare as the relevant standards, (ii) positive efficiency and welfare effects of cross-media strategies are neglected, (iii) in contrast, the competition agency sometimes appears to view profitability of post-merger strategy options to be per se anticompetitive (efficiency offence), (iv) the incontestability of the relevant markets is not sufficiently substantiated, (v) inconsistencies occur regarding the symmetry of the TV advertising market duopoly versus the unique role of the BILD-Zeitung and (vi) the employment of modern economic instruments appears to be underdeveloped. Thus, we conclude that the Bundeskartellamt has not embraced the European more-economic approach in the analysed decision. However, one can discuss whether economic effects are overcompensated in this case by concerns about a reduction in diversity of opinion and threats to free speech. Similar to the Bundeskartellamt, we do not consider these concerns in our a...

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“…2 In interac-1 There is by now a large literature analyzing important issues in markets subject to network effects. See, for instance Shapiro (1985, 1986), Saloner (1985, 1986), Economides and Salop (1992), Farrell and Katz (2000), Matutes and Regibeau (1992), Choi (1994), Ellison and Fudenberg (2000), Waldman (1993). Economides (1996) provides an insightful overview.…”

Section: Introductionmentioning

confidence: 99%

Local network externalities and market segmentation

Banerji

Dutta

2009

International Journal of Industrial Organization

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We are grateful to B. Jullien, M.Slade and M.Waterson for helpful comments and discussions. A version of the paper was written when the second author was visiting the Centre for Development Economics, Delhi School of Economics. AbstractThis paper models interaction between groups of agents by means of a graph where each node represents a group of agents and an arc represents bilateral interaction. It departs from the standard Katz-Shapiro framework by assuming that network benefits are restricted only amongst groups of linked agents. It shows that even if rival firms engage in Bertrand competition, this form of network externalities permits strong market segmentation in which firms divide up the market and earn positive profits. The analysis also shows that some graphs or network structures do not permit such segmentation, while for others, there are easy to interpret conditions under which market segmentation obtains in equilibrium. JEL Classification Numbers: D7

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“…This is because for t ∈ [0, t m ],Â(t) > 0 so these 33 See e.g. Farrell and Katz (2000) on network monopolies and downstream innovation.…”

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confidence: 99%

The Control of Porting in Platform Markets

Pollock

2009

The Journal of Economic Asymmetries

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Abstract. A sizable literature has grown up in recent years focusing on platform markets in which economies of scale combined with complementarities between a platform and its associated 'software' or 'services' can generate indirect network effects (that is positive feedback between the number of consumers using that platform and the utility of an individual consumer). In this paper we introduce a model of 'porting' in such markets where porting denotes the conversion of 'software' or 'services' developed for one platform to run on another. Focusing on the case where a dominant platform exists we investigate the impact on equilibrium and the consequences for welfare of the ability to control porting. Specifically, we show that the welfare costs associated with the 'control of porting' may be more significant than those arising from pricing alone. This model and its associated results are of particular relevance because of the light they shed on debates about the motivations and effects of actions by a dominant platform owner. Recent examples of such debates include those about Microsoft's behaviour both in relation to its operating system and its media player, Apple's behaviour in relation to its DRM and iTunes platform, and Ebay's use of the cyber-trespass doctrine to prevent access to its site.

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Innovation, Rent Extraction, and Integration in Systems Markets

Cited by 35 publications

References 8 publications

Unraveling Platform Strategies: A Review from an Organizational Ambidexterity Perspective

Two-Sided Competition of Proprietary vs. Open Source Technology Platforms and the Implications for the Software Industry

The Prohibition of the Proposed Springer-Prosiebensat.1-Merger: How Much Economics in German Merger Control?

Local network externalities and market segmentation

The Control of Porting in Platform Markets

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