Does a Platform Owning Monopolist Want Competition?

We consider a software vendor selling both a monopoly platform (e.g. operating system) and an application that runs on this platform. He may face competition by an entrant in the applications market. Con-sumers are heterogeneous in their preferences for both the platform and the applications. They first buy the platform and then the ap-plications. Their utility over the horizontally differentiated applica-tions is known only after they bought the platform. In equilibrium the platform seller can be better off with a competitor in the applica-tions market for three reasons. First, the platform vendor makes more profits with his platform. Second, the competitor’s entry serves as a credible commitment to lower prices for applications. Third, higher ex ante expectations of product diversity lead to a higher demand for his application. Competition may be profit enhancing even if the first two effects are absent, i.e. the product diversity effect can be suffi-cient. The model also gives an answer to the much debated question why Microsoft prices MS Office significantly higher than its operating system