Platform Annexation

The digital era has ushered in a wide range of innovative products and services that benefit consumers. Digital platforms have played a central role in helping entrepreneurs and service providers access those consumers, reducing barriers to entry by facilitating the process of matching consumers to service providers and suppliers. Yet, we have also seen new competition concerns arise. Given the importance that platforms play as intermediaries in an ever-larger share of our economic activity, it is worthwhile to study more carefully the different tactics, including acquisitions, platforms can use to obtain or maintain market power.

Since platforms are characterized by network effects (often across sides of the market) and scale economies, platform markets are frequently fairly concentrated. Despite this concentration, it is not uncommon for some types of platforms to be characterized by low margins because the parties they serve have other options. If those parties use more than one platform, they are said to “multi-home.” For example, a ride-hailing platform that brings together buyers and sellers of an auto-transportation service may find that both sides of the platform “multi-home,” or transact on a competing platform(s). Riders may have accounts and search for a given ride on Uber, Lyft, and Via, for example. Likewise, drivers may have more than one app open, looking for riders. When buyers compare offers from sellers across multiple platforms, and likewise sellers seek buyers across multiple platforms, network effects often shift to operate at the market level rather than the firm level. For example, more drivers on any platform makes ride-sharing more valuable to a rider who signs up with all platforms. This allows participants to experience the benefits of competing platforms without sacrificing the benefits of marketplace liquidity. Further, competitive pressure on both sides of each platform (ceteris paribus) keep quality and prices at competitive levels, benefiting market participants. In the platform context, the equilibrium price is known as the “take rate,” the gap between what the buyers pay and what the seller receives. Multi-homing keeps prices low by putting pressure on take rates. Available and vibrant multi-homing is therefore a strong signal that there is competition between platforms in a market and that consumers have choices.

In order to avoid strong 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 article considers a category of conduct, which is designed to achieve this objective, that we call “platform annexation.” Platform annexation refers to a practice where a platform possesses or acquires complementary multi-homing tools and operates those tools in a way that restricts or lessens efficient multi-homing by platform users. A “multi-homing tool” is any functionality that helps a consumer interact with the platforms of interest and is adopted in part because it lowers the cost of multi-homing. In pursuit of market power, the platform may attempt to exclude independently owned 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. The final result is that efficient multi-homing is impeded and competition is harmed.

The anticompetitive manipulation of multi-homing tools often resembles or involves other more familiar types of conduct, such as bundling, tying, mergers, and more. These tactics can come in procompetitive versions as well as anticompetitive versions. Applying the traditional categories to platform annexation may be complex because multiple categories may apply simultaneously, while each category encompasses scenarios beyond platform annexation. In addition, within each category, there can be procompetitive and anticompetitive forces, not all of which are applicable to the specific case of platform annexation. In this article, we zero in on the economic forces specific to platform annexation, laying out the logic using basic principles from platform economics, and then relating the analysis to the traditional antitrust categories. Our main conclusion is that when a platform “annexes” a service that was aiding multi-homing, and then manipulates that service to impede multi-homing, that conduct lessens competition between platforms. Unlike traditional vertical integration, which can align incentives among suppliers to the benefit of consumers, platform annexation creates a conflict of interest between tools providers and their constituents and harms (horizontal) competition between platforms.

How does this work? Platform annexation disrupts multi-homing by steering users 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 is often self-reinforcing because it generates further concentration of activity in the larger platform and marginalization or exit of the small platform. This kind of feedback loop often characterizes multi-sided platforms more than “old economy” businesses. And the feedback loop increases the efficacy of the platform’s strategy, enabling it to increase its profits and reduce welfare for platform constituents in the short and long run.

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