Does a Platform Owning Monopolist Want Competition?

Niedermayer, Andras (December 2005). Does a Platform Owning Monopolist Want Competition? (Discussion Papers 05-17). Bern: Department of Economics

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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. Consumers are heterogeneous in their preferences for both the platform and the applications. They first buy the platform and then the applications. Their utility over the horizontally differentiated applications is known only after they bought the platform. In equilibrium the platform seller can be better off with a competitor in the applications 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 sufficient. The model also gives an answer to the much debated question why Microsoft prices MS Office significantly higher than its operating system.

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