Job Market Paper

(with E. Carroni and S. Shekhar)

Selected for the Distinguished Affiliate Award at CESifo "Economics of Digitization" 2018. Nominated for the Antitrust Writing Award 2019. Featured Article by CESifo.
Last Updated: November 2019 . Previous Version: CESifo Working Paper 7535 - February 2019.

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Abstract: This article studies incentives for a premium provider (Superstar) to offer exclusive contracts to competing platforms mediating the interactions between consumers and firms. When platform competition is intense, more consumers affiliate with the platform favored by Superstar's exclusive deal. This mechanism is self-reinforcing as more firms follow consumer decisions and some singlehome on the favored platform creating more exclusivity in the market. Exclusivity always benefits firms and might be welfare-enhancing. A vertical merger (platform-Superstar) makes non-exclusivity more likely than if the Superstar was independent. The analysis provides novel insights for policymakers and it is robust to several variations and extensions

Non-technical summary

adapted from the summary written for the CESifo Newsletter - April 2019 Featured Article

Key issue

Many markets feature the presence of “Superstars”, i.e., agents with large capture on consumers and strong bargaining power vis-à-vis platform(s). For instance, the music industry is populated by few top-rated artists (e.g., Beyoncé, Taylor Swift) who have devoted followers Similar evidence is also shared by the market for apps (e.g., Angry Birds), open-source software (e.g., Pivotal, Red-Hat), videogames (e.g., Fortnite), top gamers (e.g., Ninja), audio-books (e.g., Robert Caro, Jeffery Deaver), or by the market for investors and peer-to-peer (P2P) payment networks. In these markets, platforms mediate the interaction between sellers and buyers, artists and listeners, gamers and viewers, consumers and firms, etc. The typical decision these agents face is between joining one or more platforms, even recurring to contractual arrangements (exclusive deals vs. non-exclusive deals). This is, for instance, the case of the videogame industry with Fortnite, the e-sport market with Ninja, the music streaming market with Beyoncè. The paper asks the following questions:

(i) Why does a Superstar offer its product exclusively on one platform at the cost of losing some audience? On the one hand, an exclusive contract might lead to large rent extraction. On the other hand, a non-exclusive contract might help to secure interactions with the entire market.

(ii) Does exclusivity hinder competition? Who are the losers and winners from exclusive contracts?

(iii) Are there anti-competitive effects stemming from vertical integration between a platform and a Superstar? In 2019, Spotify bought Gimlet, a top-rated podcast creator, whereas in the gaming industry, it is common to observe platforms’ first-party content, in-house production, and acquisitions. For instance, Fortnite’s producers launched Epic Games, a platform.

The above screenshots document the sentiment in different industries for exclusive contracts.

Approach & methodology

Following Rochet & Tirole and Armstrong, we use a parsimonious duopoly model of two-sided platforms to which the Superstar can choose to offer its content exclusively or non-exclusively. We characterize the Superstar as an agent that makes take-it-or-leave-it offers to the platforms. We present a general model and the related welfare analysis, along with several extensions demonstrating the robustness of our results.

Key findings and conclusions

The paper shows that the raison d’être of exclusivity stems from platform competition. When platform competition is intense, an exclusive contract helps the Superstar to agglomerate some consumers and, via cross-group externalities, new and old firms on the platform favored by an exclusive contract. In turn, the Superstar can extract the resulting surplus. When this ability to reshape competition is weaker, then the Superstar prefers to enjoy the benefits of accessing the total pool of consumers by offering non-exclusive deals to platforms.

Exclusivity might be welfare-enhancing if network externalities are sufficiently strong. This is because via an exclusive contract, the Superstar can agglomerate more sellers and buyers on the same platform and create surplus through the entry of new firms (e.g., demand-discovery effect).

Moreover, a merger between a platform and the Superstar increases the incentive for the vertical entity to license a product/content to the rival platform. This way, the merged entity can soften the price competition.

Our results suggest that antitrust enforcers should be cautious when applying theories of harm not originally designed for two-sided markets.


Policy Lessons

Policy lesson n. 1: Theory of harm needs adaptation to two-sided markets.

Policy lesson n. 2: Banning exclusive dealing may lead to unintended effects.

Policy lesson n. 3: Competition drives exclusivity.

Policy lesson n. 4: Due diligence when assessing vertical mergers with network effects.

Note: in any case, policymakers should ensure that the competition remains sustainable and market tipping is ruled out

The platforms mediate the interactions between consumers and firms. The firm side is composed of a fringe of small firms and the Superstar, who provides a premium product.
A non-exclusive contract, instead, maintains the symmetry in the market. Platforms split the demand equally, whereas all active fringe firms multi-home.

An exclusive contract between the Superstar and a platform (say platform 1) agglomerates more consumers on this platform and, via cross-group externalities, additional small firms. In turn, this generates additional welfare if cross-group externalities are sufficiently large.