Vertical Integration and Exclusivity in Platform and Two-Sided Markets

This paper develops techniques to analyze the adoption decisions of bothconsumers and firms for competing platform intermediaries in two-sidedmarkets, and applies the methodology to empirically measure the impactof vertical integration and exclusive contracting in thesixth-generation of the U.S. videogame industry (2000-2005). I firstintroduce a framework to structurally estimate consumer demand in thesetypes of hardware-software markets which (i) simultaneously analyzesboth hardware and software adoption decisions; (ii) accounts for dynamicissues including the selection of heterogenous consumers acrossplatforms, durability of goods, and agents' timing of purchases; and(iii) explicitly provides the marginal contribution of an individualsoftware title to each platform's installed base of users. Demandresults show the gains obtained by a platform provider from exclusiveaccess to certain software titles can be large, and failure to accountfor dynamics, consumer heterogeneity, and multiple hardware purchasessignificantly biases estimates. I next specify dynamic network formationgame to model the adoption decision of hardware platforms by softwareproviders. Counterfactual experiments indicate that vertical integrationand exclusivity benefited the smaller entrant platforms and not thedominant incumbent, which stands contrary to the interpretation ofexclusivity as primarily a means of foreclosure and entry deterrence.