Article | Journal of Economics & Management Strategy | Fall 2011

Exclusivity and Control

by Andrei Hagiu and Robin S. Lee

Abstract

We analyze platform competition for content in the presence of strategic interactions between content distributors and content providers. We provide a model of bargaining and price competition within these industries and show that whether or not a piece of content ends up exclusive to one platform depends crucially on whether or not the content provider maintains control over the pricing of its own good. If the content provider sells its content outright and relinquishes control over its price, the content will tend to be exclusive unless there are sufficient market expansion effects. On the other hand, if the content provider maintains control of its pricing, the strategic interaction between prices set by the content provider and by the platforms leads to a non-monotonic relationship between exclusivity and content quality: both high and low quality content will multihome and join both platforms, but there will be a range of quality for which content will be exclusive despite foreclosing itself from selling to a portion of the market. In addition, we show that contrary to standard results on double marginalization and pricing of complementary goods, a platform that already has exclusive access to content may prefer to relinquish control over pricing and associated revenues from the content to the content provider in order to reduce price competition at the platform level.

Keywords: general strategy; entertainment and leisure; software; Quality; Competition; Price; Sales; Expansion; Market Platforms; Revenue; Negotiation;

Citation:

Hagiu, Andrei, and Robin S. Lee. "Exclusivity and Control." Journal of Economics & Management Strategy 20, no. 3 (Fall 2011).