Platform Annexation

• Date: 01 December 2022

PLATFORM ANNEXATION

S

USAN

A

THEY

F

IONA

S

COTT

M

ORTON

*

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 con-

centrated. 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 exam-

ple, more drivers on any platform makes ride-sharing more valuable to a rider

* Stanford University and NBER, and Yale University and NBER, respectively. In the last

three years Fiona Scott Morton has engaged in antitrust litigation consulting for a variety of

governments and corporations—including Amazon, Apple, and Microsoft. Susan Athey engages

in strategy and antitrust litigation consulting for a variety of corporations—including News Cor-

poration, Oracle, and Microsoft, and further serves on the boards of directors of Expedia, Lend-

ing Club, Rover, Ripple, Turo, and non-profits Innovation for Poverty Action and CoinCenter.

The views expressed in this article are those of the authors and do not reflect the views of any

corporation or organization.

677

678

A

NTITRUST

L

AW

J

OURNAL

[Vol. 84

who signs up with all platforms. This allows participants to experience the

benefits of competing platforms without sacrificing the benefits of market-

place liquidity. Further, competitive pressure on both sides of each platform

(ceteris paribus) keep quality and prices at competitive levels, benefiting mar-

ket 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 effi-

cient multi-homing by platform users.

1

A “multi-homing tool” is any function-

ality 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 mar-

ket power, the platform may attempt to exclude independently owned tools

that promote multi-homing; for example, the platform may refuse to inter-

operate with such tools, which in turn reduces the value of the tool to partici-

pants 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 competi-

tion is harmed.

The anticompetitive manipulation of multi-homing tools often resembles or

involves other more familiar types of conduct, such as bundling, tying, merg-

ers, and more. These tactics can come in procompetitive versions as well as

anticompetitive versions. Applying the traditional categories to platform an-

nexation may be complex because multiple categories may apply simultane-

ously, 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 anti-

trust 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.

1

Platform annexation can occur on either or both sides of the market, whether or not the

other side primarily single-homes or multi-homes.