Exclusive Contracts and Multihoming Agents in Two-sided Markets∗
We investigate a two-sided market model in which two platforms compete for sellers and buyers who can participate in multiple platforms (multihoming), and one of the two platforms can make exclusive contracts with sellers. The platform faces a trade-off when it enters into exclusivity agreements with sellers, which gives it an advantage when competing for buyers but reduces its revenue from the seller side. In addition, we expect that the existence of multihoming buyers weakens the platform’s incentive to have an exclusive contract with sellers. Even when buyers can multihome, does a platform have an incentive to make exclusive contracts with sellers? If so, how does exclusive dealing affect social welfare? We obtain the following results. First, in equilibrium, the platform makes exclusive contracts with all sellers or not at all. It offers exclusive contracts to all sellers if the revenue from the buyer side is expected to be somewhat higher than the revenue from the seller side; if sellers' network externality on buyers is sufficiently large (small), it chooses fully exclusive dealing (nonexclusive dealing). Second, exclusive dealing is preferable (detrimental) to social welfare when the network externality is sufficiently large (small). Exclusive dealing encourages the multihoming of buyers, which allows agents to have more interactions on one platform and prompts more buyers to obtain stand-alone benefits from multiple platforms.
Exclusive contracts; Two-sided markets; Multihoming; Platform competition
D43, D62, L13, L14
Faculty of Commerce, Doshisha University
Junior Research Fellow, RIEB, Kobe University
*This Discussion Paper won the Kanematsu Prize (FY 2021).