A new study forthcoming in Economics Letters, co-authored by four CRA Competition experts, shows that platform-wide agreements do not inherently undermine competition. Their competitive effects depend on whether there are practical contracting limitations that prevent firms from fully competing on the value they create.
Many companies rely on a supplier to serve their existing and future customers, employees, or users. For example, an employer may contract with a health insurer to provide coverage for its current workforce and for employees it hires in the future. A common concern is that an incumbent supplier may use pricing, rebates, or other payments associated with the company’s existing customers to make it harder for a rival supplier to win the opportunity to serve the company’s new customers.
This paper shows that this concern is not always justified:
- The authors compare bargaining outcomes under platform-wide agreements—where pricing associated with the company’s existing customers depends on the incumbent supplier serving the company’s new customers—to separable agreements where this condition is absent.
- In the authors’ main model, the supplier that can generate the greater economic return from the contestable new customers wins, regardless of whether pricing for existing customers is conditional on the new business. When the rival is selected, its equilibrium payment also does not depend on the contractual form.
- The paper also shows that these results depend on a setting in which contracts can transfer value without creating distortions. Under practical contracting limitations—such as the combination of a uniform fee for each new user and new user heterogeneity—platform-wide agreements can sometimes give an incumbent supplier an advantage and lead a company to choose the incumbent supplier even when the rival supplier would generate greater economic value from the new users.
In other words, the analysis cautions against treating the form of an agreement as sufficient evidence of competitive harm. The relevant question is whether real-world contracting limitations allow the agreement to distort supplier selection.
