Platform Annexation

Abstract

In order to avoid competition, market leaders in platform markets often search for tactics that help them reduce multi-homing in the short run and thus deprive rivals of scale economies and network effects in the longer run. This paper considers a category of tactics that we refer to as “platform annexation,” designed to achieve this objective. Platform annexation refers to a practice where a platform takes control of adjacent tools, products, or services and operates them in a way that interferes with efficient multi-homing among platform users. The platform may also exclude independently owned adjacent tools that promote multi-homing; for example, the platform may refuse to interoperate with such tools, which in turn reduces the value of the tool to participants and reduces usage of the independent tool in favor of the platform’s tool. Platform annexation disrupts multi-homing in a way that steers users of its acquired tool to its platform and away from platforms of rivals. When a large platform deprives a smaller rival of participants on either side of the market, it reduces the competitiveness of the smaller platform (or deters entry by new, smaller platforms) and thus lessens the competitive pressure on itself. This advantage may be self-reinforcing and allow further concentration of activity in the larger platform and marginalization or exit of the small platform. The strategy increases profits for the larger platform and reduces welfare for platform constituents in the short and long run. We argue that the impact of platform annexation on competition is more like horizontal integration than it is a typical vertical transaction.