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Product Differentiation through Exclusivity: Is there a One‐Market‐Power‐Rent Theorem?

Product Differentiation through Exclusivity: Is there a One‐Market‐Power‐Rent Theorem? In systems industries, combinations of components are consumed together to generate user benefits. Arrangements among component providers sometimes limit consumers’ ability to mix‐and‐match components, and such exclusive arrangements have been highly controversial. We examine the competitive and welfare effects of exclusive arrangements among system components in a model of relatively differentiated applications that run on relatively undifferentiated platforms. We show that there is no “One‐Market‐Power‐Rent Theorem.” Specifically, exclusive deals with providers of differentiated applications can raise platforms’ margins without reducing applications’ margins, so that overall industry profits rise. Hence, for a given set of components and prices, exclusive arrangements can reduce consumer welfare by limiting consumer choice and raising equilibrium prices. In some cases, however, exclusivity can raise consumer welfare by increasing the equilibrium number of platforms, which leads to lower prices relative to the monopoly outcome that would prevail absent exclusivity. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Economics & Management Strategy Wiley

Product Differentiation through Exclusivity: Is there a One‐Market‐Power‐Rent Theorem?

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References (31)

Publisher
Wiley
Copyright
© 2013 Wiley Periodicals, Inc.
ISSN
1058-6407
eISSN
1530-9134
DOI
10.1111/jems.12008
Publisher site
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Abstract

In systems industries, combinations of components are consumed together to generate user benefits. Arrangements among component providers sometimes limit consumers’ ability to mix‐and‐match components, and such exclusive arrangements have been highly controversial. We examine the competitive and welfare effects of exclusive arrangements among system components in a model of relatively differentiated applications that run on relatively undifferentiated platforms. We show that there is no “One‐Market‐Power‐Rent Theorem.” Specifically, exclusive deals with providers of differentiated applications can raise platforms’ margins without reducing applications’ margins, so that overall industry profits rise. Hence, for a given set of components and prices, exclusive arrangements can reduce consumer welfare by limiting consumer choice and raising equilibrium prices. In some cases, however, exclusivity can raise consumer welfare by increasing the equilibrium number of platforms, which leads to lower prices relative to the monopoly outcome that would prevail absent exclusivity.

Journal

Journal of Economics & Management Strategy – Wiley

Published: Mar 1, 2013

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