Author(s)
Source
University of Chicago Law School, John M. Olin Law & Economics Working Paper No. 97, 2000
Summary
There are situations where sellers of video games and software might benefit consumers by coordinating on price.
Policy Relevance
The paper lays out an important explanation for why (for instance) the manufacturer of a video game platform probably out to be allowed to control which firms can make games compatible with that system. Such an explanation might be useful in the event of an antitrust challenge.
Main Points
- Many markets are structured such that consumers first purchase a “platform” like a computer or an operating system, and then over time purchase add-ons like software and video games.
- In the absence of coordination, the sellers of those add-ons will make pricing decisions that inadvertently hurt both themselves and consumers.
- The intuition is simple. If a given add-on seller lowers his price, that lower price makes consumers more likely to purchase both that add-on and the platform. That helps every other seller, because a consumer who owns the platform will be more likely to purchase add-ons. This sets up a beneficial cycle. If each seller lowers price, he loses a little money thanks to the lower price, but gains much more thanks to the increased prevalence of the platform.
- Antitrust and intellectual property law could facilitate this sort of price-lowering coordination, but litigants have to be prepared to explain these economic points under doctrines like antitrust law’s rule of reason.