Competition authorities tend to view exclusive contracts as being inherently anti-competitive if they involve suppliers with market power. However, when markets are two-sided – benefitting by matching suppliers with consumers – things can be different.
In this Expert Opinion, Shiva Shekhar (Compass Lexecon), Elias Carroni (University of Bologna), and Leonardo Madio (Toulouse School of Economics) examine the effects of exclusive deals in two-sided markets on competition and consumers. They find that exclusive contracts with ‘Superstar’ content providers (who have loyal followers or are considered high-quality) occur in markets where consumers are highly mobile and responsive to the presence of a superstar, which signals intense platform competition. These contracts bring consumers to a platform, making that platform more attractive to small providers which can also benefit consumers who value their presence. Exclusive contracts are welfare-enhancing when the network benefits are large.
The research also shows that vertical mergers in two-sided markets lead to lower prices under exclusivity, as the merged entity internalizes the network benefits the superstar gets from interactions with consumers and therefore lowers its prices relative to the pre-merger.
Competition authorities need to take account of these effects, both when assessing exclusive dealing and also when considering a vertical merger between a superstar and a platform.