Supporting Free Entry Into Markets Controlled by Digital Platforms: An Economic Analysis

Abstract

This article examines exclusionary clauses applied across networks in multi-sided markets and focuses on how revenue-sharing agreements between different types of application developers and mobile device manufacturers impact competition and consumer welfare. The study examines why incumbent market players resort to exclusionary contracts and how the competition policies applied affect the welfare of users, mobile device manufacturers, and application developers. Using a game theory model, the author shows that excluding a newcomer’s application prior to installation reduces welfare when users must incur costs to install the newcomer’s app. An incumbent developer’s motive in seeking an exclusionary contract lies in the additional profits accrued by monopolizing the digital advertising market through control of the flow of users’ personal data. These profits enable incumbents to compensate manufacturers for blocking the installation by default of a newcomer's application. A key finding from the model is that market structure is determined not by users and advertisers, whose interaction via applications creates value, but by application developers and mobile device manufacturers, who are intermediaries in the interaction between users and advertisers. The model compares the policy of prohibiting exclusionary contracts when they negatively affect consumer welfare with the policy of a choice screen, which allows users to select independently the apps they would like to use when they first launch their mobile device. The choice screen policy is preferable because its implementation removes the incentive for established developers to pursue alternative methods of blocking new entrants to the market.