Market Power and Mergers in Multi-Sided Markets

Abstract

Due to the presence of network externalities in multi-sided markets, evaluating the performance of a platform is more difficult than for a firm in a traditional market. In this paper I develop methods for determining platform marginal costs, market power, and post-merger price predictions. I show that with positive network externalities, traditional methods will underestimate unobserved marginal costs and will overstate both platform market power and post-merger pricing predictions. I also find that if a multi-platform seller partially integrates their networks, by allowing network compatibility across its multiple platforms or through backward compatibility with a previous generation, then a cannibalization effect can occur where some (potentially all) prices decrease relative to their unintegrated counterpart. Finally, I highlight the main results in an illustration on the video game market.