Product Differentiation through Exclusivity: Is there a One-Market-Power-Rent Theorem?

Authors


  • Two anonymous referees and a coeditor provided helpful comments that led to a substantial revision of the paper. We are grateful to seminar participants at Berkeley-Stanford IOFest 2009, Berkeley's 9th Summer Institute in Competitive Strategy, Berkeley's Center for Research in Telecommunications Mobile Impact Conference, IFN Stockholm, Northwestern Law School's Third Annual Research Symposium on Antitrust Economics and Competition Policy, the University of Arizona, the University of Southern California, and Wesleyan University for helpful comments and suggestions. We also thank Nokia Corporation for supporting Berkeley's Program in Business Model Innovation.

Abstract

In systems industries, combinations of components are consumed together to generate user benefits. Arrangements among component providers sometimes limit consumers’ ability to mix-and-match components, and such exclusive arrangements have been highly controversial. We examine the competitive and welfare effects of exclusive arrangements among system components in a model of relatively differentiated applications that run on relatively undifferentiated platforms. We show that there is no “One-Market-Power-Rent Theorem.” Specifically, exclusive deals with providers of differentiated applications can raise platforms’ margins without reducing applications’ margins, so that overall industry profits rise. Hence, for a given set of components and prices, exclusive arrangements can reduce consumer welfare by limiting consumer choice and raising equilibrium prices. In some cases, however, exclusivity can raise consumer welfare by increasing the equilibrium number of platforms, which leads to lower prices relative to the monopoly outcome that would prevail absent exclusivity.

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