Tuesday, October 22, 2013
Turning the Page on Business Formats for Digital Platforms: Does Apple's Agency Model Soften Competition?
O. Foros, Norwegian School of Economics (NHH) - Department of Economics, Hans Jarle Kind, Norwegian School of Economics & Business Administration (NHH), CESifo (Center for Economic Studies and Ifo Institute for Economic Research), Norwegian School of Economics (NHH) - Department of Economics, and Greg Shaffer, University of Rochester - Simon Graduate School of Business ask Turning the Page on Business Formats for Digital Platforms: Does Apple's Agency Model Soften Competition?
ABSTRACT: The agency model used by Apple and other platform providers such as Google allows upstream firms (content providers like book publishers and developers of apps) to choose the retail prices of their products (RPM) subject to a fixed revenue-sharing rule. We show that (i) this leads to higher prices if the competitive pressure is higher downstream than upstream; (ii) upstream firms earn positive surplus even when platform providers have all the bargaining power; and (iii) with asymmetric business formats (where only some platform providers use the agency model), a retail most-favored-nation clause leads to retail prices that resemble the outcome under industry-wide RPM.