Competition among multi-product platforms: Unilateral conduct

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Competition among multi-product platforms: Unilateral

conduct Comments on Belleflamme and Choi and some lessons from a

Swedish case

LEAR Conference, Rome, June 7-8, 2007 Mats Bergman

by

Mats Bergman

Swedish Competition Authority

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Jay Pil Choi

• The welfare consequences of tying in markets with two-sided platforms and multi-homing

• Examples: Media players, auction sites, payment systems, video game platforms

• A (potentially) competitive product is tied to a monopoly (or “must-carry”) product (e.g., Windows operative system)

Mats BergmanLEAR Conference, Rome, June 7-8, 2007

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• The new “twist”: tying when consumers can “multi-home”

• Assumptions in formal model:– Two differentiated platforms (linear Hotelling market)– Consumers uniformly distributed along the market– Free entry into content provision (section II and III)

or– Fixed “mass” of content providers of three types: “A

only”, “B only” and “A and B”; platforms set prices to target one or two types


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Results

• Without multi-homing by consumers, tying eliminates platform competition and this can be good or bad:– A monopoly platform increases positive

externalities– Loss of platform variety reduces welfare


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• With multi-homing consumers, tying has three effects:– Both platforms will attract larger numbers of

customers; for a given number of content providers more utility is generated (+)

– Non-exclusive content providers save on encoding costs, since A now reaches all consumers (+)

– More content may now pass through consumers’ least preferred platform (higher “transportation costs”) (?)

• Net welfare effect of tying is positive; in the equivalent model without multi-homing it would be negative


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Question 1

• The results assume symmetric equilibria, absent tying. In the case of no multi-homing, perhaps the market would have “tipped” also in the absence of tying – and perhaps as a consequence of the tying it tips in the wrong direction?


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Question 2

• In the section with multi-homing, content providers are assumed to be identical within 3 categories (A, B and AB)? Hence increased market power because of tying does not result in any inefficiencies because of higher prices to content providers? (Since all content providers within a category pays the same price = their incremental profit from joining the platform.)


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Question 3

• The model in section IV implies that tying is welfare reducing under single-homing; this result is not emphasized?


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Question 4

• What happens to the profit of the rival platform (B)? This does not directly influence welfare, but if there are fixed costs of operating a platform, tying may drive B off the market.


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Question 5

• Customers and content providers pay a single price; should we interpret this as a usage fee or an access fee? What happens if there is non-linear pricing?


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Attempted application 1• Windows Media Player (WMP) tied to Windows

– All consumers adopt WMP, an increasing fraction adopts the rival media player (RMP)

– Content providers that want to reach all consumers use only WMP, but some content providers use RMP exclusively

– Total number of content providers unchanged, some consumers can access more content and no consumer can access less

– More content may now be accessed via the consumer’s least preferred platform

– Content providers save encoding costs– Total welfare increases


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Application 2• Visa credit card tied to debit cards

– All consumers adopt Visa credit card, a rising fraction adopts AmEx

– Merchants that want to reach all consumers adopt Visa; some adopt AmEx exclusively

– The number of credit-card accepting merchants is unchanged, but the number of merchants that accept one of the credit cards an “average” consumer carries increases

– Consumers may lose from having to use the least preferred card, but merchants save on “adoption costs”

– Welfare increases


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Application 3• IP (pay) tv tied to telephony subscription • All consumers adopt IP tv; an increasing fraction

also adopts satellite tv• Channels that wants to reach all viewersuse only IP

tv, but some use exclusively satellite broadcasting• Total number of channels fixed, but the average

viewer has more channels• Consumers may lose from having to view some

channels via the least preferred distribution system, but channels save on encoding costs

• Welfare increases


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Question to Paul Belleflamme

• Profit to intermediary falls as the per-interaction profit and utility to end buyers & sellers increase

• (Intuition: In an ordinary Hotelling market, profit doesn’t increase in consumer utility, if the market is already covered. Here, there is in addition an effect that comes from competition for the network effects.)

Mats BergmanThe Ticnet case – exclusion in a two-sided market?

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• Q1: will the intermediary have incentives to prevent innovations that increase seller profits and consumer utility?

• Q2: Do you really think that the intermediary would not like to increase to total available surplus? Can you give an example?


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A Swedish case: Exclusive contracts in the (outsourced)

internet ticketing market

Ticnet (Ticketmaster)

The Ticnet case – exclusion in a two-sided market? Mats Bergman

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Exclusion in multi-sided platform?

The Ticnet case – exclusion in a two-sided market?

Ticnet

R

X

Y

Mats Bergman

Z

A

B

C

C o n s u m e r s

Event organizers (promoters)

Ticket printing (retailers of lotteries & gaming)

W

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Ticketing – 2 channels


• Outsourcing– Sales and distribution (all or part of) handled

by specialized company

• In-house– Manual ticketing or use of internally

developed (”low tech”) software

Mats Bergman

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Dominance & behaviour• Ticnet’s market share: 80-90 %• Exclusive long-term contracts with event

organizers• Exclusivity covers the three main activities:

– Internet sales– Ticketing & seating systems– Distribution

• Exclusivity also with the largest and most sophisticated retailer (for printing and OTC payment)


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Some market characteristics

• Bargaining market– Costs and prices vary significantly between

customers

• Total market relatively small– 10-15 M euro per year


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Ticnet’s contracts


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Exclusionary effect?1. A two-sided markets: final customers go to the

webbpage of the largest ticketing company and event organizers go where most customers are

2. Event organizers contractually prevented from selling via more than one ticketing company

3. Event organizers prevented from purchasing system components separately

4. At each point in time, only a small fraction of the market is open for competition


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Efficiencies

• Relatively large customer-specific fixed start-up costs

• Also the event organizer has relation-specific fixed costs

Long-term contracts promotes relation-specific investments

• Absent long-term contracts, the customer would have to pay for relation-specific investments up-front – and hence be locked-in anyway


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• Simultaneous use of two systems is costly (incl coordination of seating)

Event organizers prefer not to dual source


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• After the initial three-year exclusive period, contracts can be terminated with 6 months notice

• Event organizers will only consider changing ticketing provider between seasons (once a year)

Extending exclusive contracts does not effectively restrict customers


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• Limited returns to scale

• Customers claimed that there is effective competition, but that long-term exclusive contracts are needed to elicit competition

• Conclusion: What looked like an obvious violation of Art 82 was found to be quite acceptable

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Ticketing a vertical relation?


Ticnet R

X Y

Mats Bergman

Z

A B C

C o n s u m e r s

Event organizers (promoters)

Ticket printing (retailers of lotteries & gaming)

W

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Competition among multi-product platforms: Unilateral conduct

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