Usage Lock-In and Platform Competition

Abstract

In platform markets, consumers often choose which platform to use for making a bundle of transactions with sellers rather than for each transaction. Based on a competition-in-utility framework, I analyze the impact of such usage lock-in on platform competition. Usage lock-in allows platforms to extract sellers' transaction surplus, which increases the platforms' willingness to compete for usage. Consequently, usage lock-in induces an excessive platform competition and leads to higher consumer surplus, lower seller surplus, and often higher platform profits. Analyses of entry, merger, and limit pricing show that intensifying platform competition often negatively affects welfare by exacerbating the problem of excessive competition. Furthermore, in the long run, usage lock-in may hurt even consumers and platforms by discouraging seller investments. The result of this study provides a rationale for recent policy intervention toward platforms' strategies that benefit consumers at the expense of sellers.