FORECLOSURE INCENTIVES WITH NETWORK EFFECTS: A FRAMEWORK FOR SCREENING DIGITAL MERGERS

ABSTRACT This paper proposes a simple yet useful framework for evaluating vertical mergers in digital markets by distinguishing between product-specific and ecosystem-specific network effects. Vis-à-vis no network effects, product-specific network effects amplify foreclosure and steering incentives, as a rival’s growth directly undermines the platform’s product value. Conversely, ecosystem-specific effects dampen foreclosure incentives, because rivals contribute to the overall value of the platform ecosystem. We develop a formal model illustrating how this distinction shapes platform behavior and competitive outcomes. We apply this distinction to real-world examples to illustrate its potential usefulness. Our distinction implies that regulators may want to adopt a stricter standard with no presumption of efficiencies where product-specific effects dominate. In contrast, when ecosystem-specific effects prevail, merger evaluation should mirror traditional vertical merger analysis, thus offering a more nuanced approach to merger evaluation by presenting a practical screening tool to identify problematic vertical mergers in markets featuring network effects.