Platform Contracting and Exclusivity

Platforms care about the quality of components they host. For example, a computer operating system is more popular - and thus more profitable - when the software is high quality. Some platforms offer special arrangements to high-quality firms - for example, Apple promotes high-quality Macintosh software on the Apple website. Others shut out low-quality firms completely. Nintendo has established a reputation for screening out low quality games from their game console. Finally, some platforms require exclusive contracts, whereby a component cannot be made available on any other platform, many TV sports programming contracts are designed this way.We study the contract design options of a platform owner offering a screening contract to a component developer who should be incentivized to deliver a particular quality level. When dealing both with adverse selection (component quality types are not known to the platform ex ante) and moral hazard (efforts to improve the component or offer customer service are not observable to the platform), the platform will use additional allocative distortion compared to the standard screening contract. Of particular interest is our finding that under exclusivity, when high-quality components require a higher participation rent, there is less allocative distortion, permitting a new interpretation of countervailing incentives in a platform-contracting environment