A PYMNTS Company

Economics Of Vertical Restraints For Multi-Sided Platforms

 |  July 29, 2013

David Evans, Jul 28, 2013

This paper presents an overview of what economists can say about vertical constraints by multi-sided platforms at this stage in the development of our knowledge about the economics of these businesses. It describes the general procompetitive and anticompetitive uses of vertical restraints by multi-sided platforms. It then focuses on the role of critical mass for multi-sided platforms and how vertical restraints might be used on the one hand, anti-competitively to prevent rivals from achieving critical mass and long-term growth and, on the other hand, pro-competitively, to ensure the platform and its customers that the platform will remain viable.

Some firms enter into agreements with their customers that limit their ability to buy from rivals of the firms. These agreements are called “vertical restraints.” They include exclusive-dealing contracts, tying and bundling, conditional rebates, and meeting competition clauses. There is an extensive literature on how these restraints could increase economic efficiency, on the one hand, and how they could harm competition and consumers, on the other hand. Vertical restraints are also the subject of a considerable body of decisions by courts and competition authorities.

This paper is about the use of vertical restraints by a particular kind of business known as a multi-sided platform. Multi-sided platforms create value by serving as intermediaries between two or more types of customers where one type of customer can realize value by interacting with another type of customer. The demand by one type of customer depends on the participation on the platform of one or more of the other types of customers.