Platform-based information goods: The economics of exclusivity

This paper explores the role of exclusive contracting between vendors of platforms (such as video game consoles) and vendors of complements (such as video games). The main questions of interest are: When do we observe complement exclusivity, and what is the impact of exclusive contracting on prices, profits and efficiency? We answer these questions by developing a model of competition between platforms in an industry with indirect network effects, and deriving some insightful analytical and numerical results. While complement vendors have natural incentives to be available on all platforms, we establish conditions under which they can be contracted for exclusive supply on a single platform. Exclusivity eases competition in the platform market and can significantly help increase a platform's adoption. However, exclusivity choice presents a key trade-off for the complement vendor a larger platform offers access to a larger market, but also more competition, as compared to a smaller platform. We find that exclusivity is more likely in the nascent and very mature stages of the platform market, whereas non-exclusivity is more likely in the intermediate stages. Interestingly, our numerical analysis suggests that a complement vendor might sometimes prefer being exclusive on the smaller platform, rather than the larger one. (C) 2010 Elsevier B.V. All rights reserved.