Platforms with Restrictive Licensing

Abstract

Two-sided platforms coordinate two types of users in order to increase the value of the whole system surrounding the platform. Users of a platform have different outside opportunities, and these influence their behavior on the platform. Platforms often limit these outside projects through restrictive licensing agreements. These are often thought to reflect market power and a foreclosure motivation, but it shows that they can be a way of managing the “quality commons” aspect of a platform. This chapter analyzes a platform where all component developers produce two kinds of quality—inside quality for their offerings on the platform and outside quality on their outside project. It shows that there are cases where restrictive licensing agreements that shut down the outside projects can increase social welfare, while in other cases they reduce social welfare. The reason is that if consumers and the platform value components inside quality enough, all agents prefer to be protected from low-quality behavior, even at the cost of giving up outside projects.