The Competitive Effects of Vertical Integration in Platform Markets

We analyze vertical integration between platforms providing operating systems to manufacturers of devices in presence of indirect network effects between buyers of devices and developers of applications. Vertical integration creates market power over non-integrated manufacturers and application developers. That market power provides the merged entity with the ability to coordinate pricing decisions across both sides of the market, which allows to better internalize network effects. Vertical integration does not systematically lead to foreclosure and can benefit all parties, even in the absence of efficiency gains. Its competitive impact depends on the strength and the structure of indirect network effects