DP17681 The Competitive Effects of Vertical Integration in Platform Markets
We analyze vertical integration between platforms providing operating systems to manufacturers of devices when there are indirect network effects between buyers of devices and developers of applications. Vertical integration creates market power over developers, and over non-integrated manufacturers but only under certain circumstances. That market power enables to coordinate pricing decisions across both sides of the market, which leads to a better internalization of network effects. Vertical integration does not systematically lead to foreclosure and can benefit all parties, even in the absence of efficiency gains. Its competitive impact depends on the strength and the structure of indirect network effects.