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Exclusivity and exclusion on platform Markets

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Abstract

We examine conditions under which an exclusive license granted by the upstream producer of a component that some consumers regard as essential to one of two potential suppliers of a downstream platform market can make the unlicensed supplier unprofitable, although both firms would be profitable if both were licensed. If downstream varieties are close substitutes, an exclusive license need not be exclusionary. If downstream varieties are highly differentiated, an exclusive license is exclusionary, but it is not in the interest of the upstream firm to grant an exclusive license. For intermediate levels of product differentiation, an exclusive license is exclusionary and maximizes the upstream firm’s payoff.

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Notes

  1. See the Appeals Court decision in Times Herald Printing Co. v. A. H. Belo Corporation et al. (Court of Appeals of Texas, Fourteenth District) 820 S.W.2d 206; 1991 Tex. App. LEXIS 2899; 335-66 Trade Cas. (CCH) P69, 680 (1991). Also see Gelsanliter (1995).

  2. The rise of the internet has made print media a declining industry. (The general increase in concentration in the newspaper markets of US cities, and the corresponding reasons and consequences are discussed in Bucklin et al. (1989) and Genesove (2003).) Our stylized model is not meant to imply that the Morning News’ exclusive arrangement with the United Press Syndicate was the unique factor responsible for the demise of the Times Herald. But the fact that the Times Herald’s otherwise unsuccessful legal action resulted in a $1.5 million private settlement is consistent with the view that the exclusive arrangement was a contributing factor in the demise.

  3. See Huff, Richard “‘Project Runway’ quits Bravo for Lifetime,” NYDailyNews.com 7 April 2008; Lafayette, Jon “NBCU wins round in ‘Project Runway’,” TVWeek.com, 26 September 2008; Associated Press, “‘Project Runway’ is cleared for move to Lifetime from Bravo,” 1 April 2009. For a further example of an exclusionary strategy based on loss of advertising revenue in a platform market, see Lorain Journal Co. v. United States, 342 U.S. 143 (1951). Similarly, T-Mobile’s failure to obtain the right to sell Apple iPhones was mentioned as a factor in its proposed March 2011 takeover by AT&T. Other examples are provided by “killer apps” available only on a single platform; see Viecens (2009).

  4. Full details of proofs are contained in an appendix that is available on request from the authors.

  5. We incorporate this effect in our model by assuming that a fraction \(\mu \) of the reader side of the market will read a newspaper, if at all, only if it includes an essential complementary good, as further discussed in Sect. 3.2.

  6. See also the remarks of Rey and Tirole (2007), p. 2205.

  7. See also Stennek (2014), Weeds (2015).

  8. Lee (2013) analyzes the impact of vertical integration and exclusivity on the sixth generation of the U.S. video game industry. He finds that exclusive contracts facilitated entry, but notes that this is not a necessary outcome (p. 2962): “although certain exclusive titles on the incumbent platform sold more copies than any title on the entrant platforms, estimates indicate that these titles did not influence hardware demand as much as those onboard the entrants. If it were the case that the most valuable software products were exclusive to the incumbent in the data, then the predictions of the counterfactual would have been reversed.” Shapiro (1999), p. 676 ascribes exclusionary effects to exclusive contracts entered into by the Nintendo Entertainment System.

  9. Rysman (2007) documents that credit-card users concentrate purchases on one credit card, in effect single-homing, while holding infrequently-used credit cards in reserve. In the same way, one may take the assumption of single-homing newspaper readers as approximating the conduct of users who read primarily one newspaper, while occasionally looking at other newspapers.

  10. In the context of newspaper markets, preferences might relate to the ideological position of a newspaper’s editorial page. Alternatively, preferences might represent the time of day at which a reader would prefer to receive a newspaper; in practice, the alternatives are morning and evening.

  11. In what follows, unless otherwise noted, references to “newspaper i” should be understood to carry the qualification “for \(i=A\), B.”

  12. It would be possible to model the syndicate’s arrangements with the authors of the material it markets; this would take us far afield from our topic.

  13. In principle, one might include a third option, not to offer a license to either newspaper. The syndicate’s payoff for this option is zero economic profit, it would not be a profit-maximizing choice, and we eliminate it for simplicity.

  14. “Staying out of the market” means the newspaper can earn a normal rate of return on investment elsewhere.

  15. See Rosse (1970) for an estimation of advertising cost in newspaper and Armstrong (2006) for discussion of the case in which the price of placing an advertisement is not proportional to the number of readers.

  16. We follow Armstrong (2006) and model advertisements as information-containing messages that are valued by consumers. This specification makes explicit the reason businesses find it profitable to advertise: by informing readers of a purchase opportunity, advertisers increase sales. An alternative specification would treat advertisements as bads rather than goods; see Kind et al. (2007) for a model of the television market along these lines. In this formulation, even though advertisements reduce readers’ utility, they are profitable for firms.

  17. Equation (18), Sect. 5.1, gives the maximum value of t for the market to be covered in low-t duopoly if both newspapers are licensed to publish the essential complementary material.

  18. See the discussion in Section 2 of Hogendorn and Yuen (2009).

  19. The fixed cost of gathering news to produce the first copy of the paper is typically high, the variable cost to print and sell additional copies of newspaper low. See Rosse (1970) and Strömberg (2004) for estimation and interpretation of cost structures in the newspaper market.

  20. If one newspaper has an exclusive license to publish the complementary good, the assumption is that the submarket of readers who are indifferent to the complement is covered.

  21. This in turn implies that a licensed monopolist is profitable in the low-t case.

  22. Nothing is gained by combining the terms in t on the right in (22) and (23).

  23. In equilibrium, it is \(L_{A}^{1}\) that is paid in the first game, \( L_{AB}^{2} \) that is paid in the second game. The other license fees maximize the syndicate’s payoff off the equilibrium path. If the syndicate specifies license fee \(L_{A}^{1}\) for all states of the world in the first game, and license fee \(L_{AB}^{2}\) for all states of the world in the second game, Nash equilibrium outcomes are as indicated in the text.

  24. We do not enter into the debate over the Kaldor–Hicks hypothetical compensation principle, which leads to use of net surplus as a welfare measure, and Lionel Robbins’ view that the components of net surplus should be examined separately, the terms of which are well known (see Chipman and Moore 1978).

  25. The license fee determines the division of this surplus between newspaper and syndicate, but does not affect the amount of the surplus.

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Acknowledgments

We thank Ralph Siebert, Dries De Smet, seminar participants at the IUPU—Indianapolis, Purdue University, the University of East Anglia, the Korea Institute of Industrial Economics and Trade, the University of Louisville, participants at the ZEW Conference on Platform Markets, Mannheim, and three anonymous referees for useful comments. Responsibility for errors is our own.

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  1. University of East Anglia, Norwich, UK

    Subhasish M. Chowdhury

  2. Purdue University, West Lafayette, USA

    Stephen Martin

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Correspondence to Stephen Martin.

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Chowdhury, S.M., Martin, S. Exclusivity and exclusion on platform Markets. J Econ 120, 95–118 (2017). https://doi.org/10.1007/s00712-016-0499-z

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