Evans on Antitrust Economics of Vertical Restraints for Multisided Platforms from December 2012

The Economics of Vertical
Restraints by Multisided
Platforms
David S. Evans
GlobalEcon, University of Chicago, and University College London
6 December 2012
Vertical Restraints Adopted by Dominant Firms
CEDES, Brasilia, Brazil

Why Focus on Multisided Platforms?

New
and
rapidly
growing
economic
literature
with
important
an4trust
applica4ons

Many
important
industries
including
exchanges,
media,
cards,
and
key
online

businesses

Many
compe44on
policy
cases
such
as
shopping
malls,
media
players,
payment
cards

and
search
engines

© Global Economics Group. Do Not Distribute Without Permission

Overview

Economics
of
Mul4sided
Pla>orms

Cri4cal
Mass
and
Ver4cal
Restraints

Pla>orm
Governance
and
Ver4cal
Restraints

An4trust
Analysis
of
Ver4cal
Restraints


Section 1

ECONOMICS OF MULTI-SIDED
PLATFORMS

OpenTable Is Intermediary between Diners and
Restaurants


5

Restaurants Pay and Consumers Use Free

$119
million
NA
revenue
in
2011
|

$1.02
billion
markets
cap


6

OpenTable Solves Transaction Cost Problem

$119
million
NA
revenue
in
2011
|

$1.02
billion
markets
cap


7

Positive Feedback Effects Fuel Growth

Ø  27
million
reserva4ons
in

2011Q4
a
month
up
from

19
million
in
2010Q4

Ø  25k
restaurants
in

2011Q4
up
from
20k
in

2010Q4

Ø  More
than
40%
annual

growth
in
revenue


8

Many Similar “Multi-sided Platform” Businesses
Positive
COMPANY

Feedback Effects Fuel Business Growth
CUSTOMER
SIDE
A

CUSTOMER
SIDE
B
CUSTOMER
SIDE
C

Apple
iOS

Users

Applica4on

Developers

MNOs

Google
Search

Searchers

Adver4sers

Websites

Deutsche
Bourse

Liquidity
providers

Liquidity
takers

eHarmony

Men

Women

Época

Readers

Adver4sers

Aricanduva

Retail
Stores

Shoppers

American
Express

Cardholders

Merchants

Facebook

Friends

Adver4sers


Applica4on

Developers

9

Multi-sided Platforms Create Value by Reducing
Transaction Costs

Pla>orms

enable
two

or
more

types
of

customers,

who
could

engage
in

mutually

valuable

exchange


to
ﬁnd

each
other

though

search
and

matching

to

transact,

and
to

thereby

create
and

exchange

value.

10

Common Platform Features

PosiIve

Indirect

Network

Effects

Type
A
customers
value
pla>orm
more
if
there
are
more
Type
B
customers

and
oen
vice
versa.

Money/
Subsidy
Side

Pla>orms
oen
give
one
side
a
“break”
and
make
their
profits
for
the
other

side.

Stores
like
malls
with
more
foot
traffic;
shoppers
like
malls
with
more

diverse
stores.

Consumers
don’t
pay
to
make
reserva4ons
and
even
get
reward
points
on

reserva4on
pla>orms.

Single/MulI-‐
homing

If
customers
on
side
A
only
use

pla>orm
1
(“single
home”)
then
the

customers
on
side
B
can
only
reach
these
customers
through
the
pla>orm
1

(so
pla>orm
is
a
“compe44ve
boeleneck”).

Soware
developers
can
only
“reach”
iPhone
users
by
developing
by
the

iOS


11

Impact on Economic Models

General
Result

Most
economic
models/tools
used
in
an4trust
ignore
interdependent

demands
from
mul4ple
pla>orm
sides
and
are
therefore
“misspeciﬁed”

We
now
know
from
literature
that
results
of
standard
models
do
not

necessarily
hold
for
mul4-‐sided
pla>orms

Market

DeﬁniIon

Standard
SSNIP
and

UPP
tests
wrong
for
mul4-‐sided
pla>orms.

Standard
tests
are
mathema4cally
wrong
and
give
biased
results

Economic

models
of

exclusionary

pracIces

Economic
models
(e.g.
Whinston
on
tying)
based
on
many
assump4ons
to

begin
with
and
not
very
robust.

Results
do
not/may
not
once
interdependent
demand
between
two
sides
is

introduced.


12

Section 2

CRITICAL MASS AND VERTICAL
RESTRAINTS

YouTube Ignited in Late 2005
TABLE 1 -- YOUTUBE UNIQUE VISITORS ('000)
70,000.000

Both
sides
essenIal
for
launch

60,000.000

YouTube
needed
content
creators
and

content
viewers

50,000.000

40,000.000
YOUTUBE

30,000.000

Need
strategies
to
get
both
sides
on
board

YouTube
tried
mul4ple
strategies
to
increase

uploading
and
viewing
of
videos

20,000.000

IgniIon
requires
geQng
enough
on
board

10,000.000

ma
y
jun 05
0
jul 5
aug 05
sep 05
oct 05
nov 05
dec 05
jan 05
feb 06
ma 06
r
ap 06
ma r 06
y0
jun 6
0
jul 6
aug 06
sep 06
oct 06
nov 06
dec 06
jan 06
feb 07
ma 07
r
ap 07
ma r 07
y0
jun 7
0
jul 7
aug 07
sep 07
oct 07
nov 07
dec 07
jan 07
feb 08
08

0.000

Slow
growth
from
February
to
December

2005
when
YouTube
shows
an
inﬂec4on
point


14

Platforms Need Critical Mass to Ignite

CriIcal
mass

Cri4cal
mass
refers
to
the
minimal
set
of
customers
on
each
side

that
is
large
enough
to
aeract
more
customers
and
result
in

sustainable
posi4ve
feedback

CriIcal
mass
depends
on
scale
and
balance

Probability
of
customers
from
two
sets
gejng
together
and

exchanging
value
increases
with
the
number
of
customers
on

each
side

PlaRorms
implode
if
they
can’t
reach
criIcal
mass

If
there
aren’t
enough
customers
on
the
other
side
the

probability
of
advantageous
exchange
falls
and
customers
don’t

join
and
the
early
adopters
who
have
eventually
leave


15

Successful Platform Launch Depends on Critical
Mass

CriIcal
mass
corresponds
to
a
combinaIon
of
scale
and
balance
that
is

minimally
suﬃcient
to
ignite
the
plaRorm

1200

1000

800

600

400

200

Each
point
reﬂects
a
combina2on
of
scale
(how
many
customers)

and
balance
(propor2on
of
customer
types)

0

0

200


400

600

800

1000

16

Critical Mass, Platform Ignition and Growth

Catalytic Ignition and Critical Mass

Side
A

Ignition

D*- Long-run equilibrium
C`

Points of critical mass

Movements at starting to achieve
critical mass

C*
C``

O


Side B

In
this
example
the

cri4cal
mass
points

are
between
C’
and

C”.

C*
is
the
point
that

would
lead
to

op4mal
pla>orm

launch.

Points
to
the
NW
of

the
vector
0-‐C’
and
to

the
SW
of
vector
0-‐C”

would
result
result
in

pla>orm
implosion.

17

Three Phases of Platform Growth

IniIaIon

TABLE 1 -- YOUTUBE UNIQUE VISITORS ('000)

Pla>orm
undertakes
strategies
to
get
to
cri4cal

mass

70,000.000

60,000.000

IgniIon
and
Rapid
Growth

50,000.000

Pla>orm
reaches
cri4cal
mass
and
gets
self-‐
sustaining
posi4ve
feedback
eﬀects

40,000.000
YOUTUBE

Maturity

30,000.000

20,000.000

Pla>orm
reaches
proﬁtable
equilibrium
and

grows
through
compe44on
and
market
growth

10,000.000

ma
y
jun 05
0
jul 5
aug 05
sep 05
oct 05
nov 05
dec 05
jan 05
feb 06
ma 06
r
ap 06
ma r 06
y0
jun 6
0
jul 6
aug 06
sep 06
oct 06
nov 06
dec 06
jan 06
feb 07
ma 07
r
ap 07
ma r 07
y0
jun 7
0
jul 7
aug 07
sep 07
oct 07
nov 07
dec 07
jan 07
feb 08
08

0.000


Some
pla>orms
can
secure
precommitments
from
both
sides
and

thereby
collapse
ini4a4on
and
igni4on
into
immediate
growth
at

startup.

18

Initiation and Getting to Critical Mass

Early

adopters

Customers
who
like
to
try
new
things

High-‐value

customers

Customers
that
place
high
expected
value
on
par4cipa4ng
in
the
pla>orm

Highly

aUracIve

customers

Exclusive

deals

Customers
on
one
side
who
are
highly
valued
to
customers
on
the
other

sides

ExpectaIons

of
success

Shape
customer
expecta4ons
that
the
pla>orm
will
provide
value
in
order

to
get
customers
to
mul4-‐home
or
single
home
on
pla>orm

Exclusive
deals
force
customers
on
the
other
side
to
use
the
pla>orm
to

gain
access
to
these
customers


19

Making It Harder for Rivals to Reach Critical
Mass
Lock
enough

demand
on

either
side

By
keeping
available
demand
below
the
minimal
level
on
either
side
the

new
pla>orm
cannot
reach
the
cri4cal
mass
fron4er.

Lock
up

enough

demand
on

both
sides

By
locking
up
enough
demand
on
both
sides
the
new
pla>orm
cannot
reach

the
cri4cal
mass
fron4er

Lock
up
key

assets

needed
for

igniIon

By
locking
up
customers
that
account
for
a
dispropor4onate
share
of

posi4ve
feedbacks,
are
early
adopters,
or

high
value
users,
or
by

preemp4ng
exclusive
deals,

the
new
pla>orm
could
be
prevented
from

reaching
the
cri4cal
mass
fron4er

These
are
possibili4es.
Unclear
how
signiﬁcant
they
are
in
prac4ce
given
that
rivals
have

counterstrategies.


20

Vertical Restraints that Might Deter Entry

Exclusive

Deals

Locks
up
demand
on
one
or
both
sides
of
the
pla>orm

CondiIonal

rebates

Discourages
customers
from
using
rival
pla>orm
and
therefore
engaging
in

mul4homing
or
single
homing
with
entrant

Other

restraints

Behavioral
restraints
(tying,
pricing
restric4ons,
various
behavioral

restraints,
etc.)
could
raise
the
cost
of
commijng
demand
to
a
rival

pla>orm


21

Some Procompetitive Explanations of Vertical
Restraints

Exclusivity

benefits

customers

Customers
on
side
B
benefit
from
knowing
that
when
they
use
the
pla>orm

they
will
be
get
access
to
par4cular
customers
on
side
A.

Reduces
their

search
and
transac4ons
costs.

Exclusivity

reduces

plaRorm
risks

By
reducing
risk
that
customers
on
one
side
will
reduce
demand
and

thereby
jeopardize
value
of
the
value
to
all
sides
the
pla>orm
is
able
to

make
greater
sunk
cost
investments
including
in
innova4on.

Exclusivity

prevents
free

riding

Pla>orm
may
have
incurred
significant
risks
in
entering
in
developing

customer
groups
to
maximize
pla>orm
value.

Exclusivity
agreements

prevent
copycats
from
freeriding.

Behavioral

restricIons

benefit

customers

Restric4ons
on
side
A
customers
benefit
side
B
customers
by
preven4ng

opportunism


22

Balancing and Some Complexities

Degree
of

impediment
to

entry

Impediment
depends
on
the
“type”
of
customers
excluded
as

well
as
and
perhaps
more
so
than
sheer
volume
of
demand

foreclosure.

Could
prevent
entry
by
foreclosing
some
demand

on
both
sides.

Counter

strategies

Stage
of

Can
differen4a4on
enable
entry
despite
exclusive
deals
by
incumbent

pla>orms?

Can
entrant
enter
into
exclusive
deals
of
its
own?

compeIIon

Incumbent
may
have
exclusive
dealing
arrangements
as
part
of
entry

strategy
to
deal
with
cri4cal
mass

Behavioral

restricIons

Ver4cal
restraints
may
benefit
customers
that
are
not
subject
to
ver4cal

restraints
(e.g.
the
other
side
of
the
pla>orm).

Incumbent
vs.
Entrant
could
be
powerful
pla>orm
in
adjacent
business
while
incumbent

could
be
successful
startup.
Difficult
to
assess
impact
of
an4trust
restraints

entrant

on
long
run
social
welfare
(Microso
vs.
Netscape).


23

Section 3

PLATFORM GOVERNANCE AND VERTICAL
RESTRAINTS

Platforms Harness Externalities

A
Place
to

Get
Together

Pla>orm
provides
a
physical
or
virtual
environment
for
diﬀerent
types
of

customers
to
get
together.

Ways
to

Connect
and

Create
Value

Pla>orm
provides
search
and
matching
methods
for
helping
customers
ﬁnd

“value-‐crea4ng”
transac4ons
and
for
exchanging
value.

Manage

externaliIes

Pla>orms
manage
posi4ve
and
nega4ve
externali4es
to
increase
value
that

members
can
realize
from
the
pla>orm.


25

Platforms Helping One Side

Kanyon
Mall
in
Turkey
“is
appropriately

named
in
light
of
the
shape
of
the
building,

with
the
"canyon
walls"
comprised
of
four

winding
retail
levels.”
The
canyon
was

made
primarily
with
stone,
4le
and

concrete.


26

Platform Design and Rules Promote Positive
Externalities

SorIng
Devices

to
Get
Right

Customers

“Exclusionary
vibe”

(JDate
discourages
Gen4les)

“Exclusionary
amenity”

(Upscale
anchor
stores
discourages
low-‐end
shoppers)

Search

Diversion

Design
rules
encourage
one
type
of
agent
to
meet
another
type
of

agent
who
really
values
them
but
may
not
seek
out
by
themselves

Shopping
malls
with
anchor
stores
at
either
end


27

Platforms and Bad Behavior
SAC
Insider
Case
Rides
Finra

Referral
to
Cohen’s
Backyard


Vitaly Borker Gets 4 Years
for Threats, Terror Used to
Boost Google Rankings

28

Governance of Bad Behavior that Mitigates
Negative Externalities

Rules

Prohibi4ons
on
ac4ons
that
could
harm
other
agents

(usually
those
on
other
side
of
match/transac4on)

eBay
has
detailed
rules
for
buyer
and
seller
behavior

No
misleading
ads
(sellers)
and
no
mul4ple
auc4ons
for
same
good
(buyers)

DetecIon
and

Monitoring

Systems
to
determine
if
rules
are
being
broken

Facebook
has
hundreds
of
employees
looking
for
bad
pictures
and

bad
language

Enforcement

Pla>orms
have
and
use
“Bouncers
Rights”
to
exclude
violators

Google
manually
reduces
ranks
of
websites
that
violate
rules
for
90

days
and
some4mes
delists
websites


29

Welfare Effects of Rules

PromoIng

posiIve

externaliIes

has
costs

Sor4ng
devices
harm
customers
that
can’t
get
on
pla>orm
or
don’t

get
their
preferred
matches

Governing
bad

behavior
has

costs

Customers
lose
benefits
from
viola4ons

PlaRorm
has

incenIves
to

balance

benefits
and

costs

Pla>orm
can
make
more
money
by
promo4ng
posi4ve
externali4es

and
reducing
nega4ve
ones

Search
diversion
benefits
side
that
gets
from
looks
but
not

necessarily
side
that
has
been
diverted.

Customers
also
lose
from
false
posi4ves
in
enforcement

Pla>orm
value
is
greater
and
pla>orm
profit
greater
too


30

Vertical Restraints and Platform Governance

AnI-‐steering/
exclusive

dealing
rules

Might
deter
entry,
but…

No
surcharge

rules

Might
deter
entry,
but
…

Give
customers
on
other
side
assurance
that
when
they
use
the

pla>orm
they
will
get
the
pla>orm’s
products

Prevents
opportunis4c
behavior
and
provides
customers
price

certainty
for
pla>orm

PlaRorm

exclusion

penalIes
and

rules

Might
prevent
alterna4ve
pla>orm
from
accessing
users,
but
…

Punishes
customers
on
one
side
from
harming
customers
on
the

other
side
through
fraud,
decep4on,
and
other
bad
behavior.


31

Section 4

ANTITRUST ANALYSIS OF VERTICAL
RESTRAINTS

Factors to Consider in Evaluating Vertical
Restraints for Platforms
Impact
of

restraints
on

achieving
criIcal

mass

To
what
extent
do
restraints
preclude
strategies
necessary
for
reaching
cri4cal
mass
and

are
there
effec4ve
counterstrategies

PlaRorm
and

Industry
Stage
of

Development

Restraints
more
likely
to
be
residue
of
procompe44ve
strategy
and
s4ll
provide
efficiencies

in
earlier
stages.

Impact
on
all
sides

Benefits
and
costs
should
be
evaluated
by
looking
at
impact
on
all
customer
sides

Role
in
managing

externaliIes

Possible
efficiencies
from
managing
posi4ve
and
nega4ve
pla>orm
externali4es
should
be

considered.

Robustness
of

standard

economic
models

No
reason
to
believe
that
the
result
of

economic
models
that
do
not
consider

interdependent
demand
hold
for
mul4sided
pla>orms
and
results
of
literature
so
far
show

that
the
results
do
not
in
fact
hold
in
important
cases.


33

Thank You!

DAVID
S.
EVANS

Global
Economics
Group
|
Chairman

david.evans@globaleconomicsgroup.com

Mobile:
+1
617
320
8933

Skype:

david.s.evans


34

Evans on Antitrust Economics of Vertical Restraints for Multisided Platforms from December 2012

Recommended

Recommended

More Related Content

Similar to Evans on Antitrust Economics of Vertical Restraints for Multisided Platforms from December 2012

Similar to Evans on Antitrust Economics of Vertical Restraints for Multisided Platforms from December 2012 (20)

Recently uploaded

Recently uploaded (20)

Evans on Antitrust Economics of Vertical Restraints for Multisided Platforms from December 2012