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Restraints on Platform Differentiation

 |  July 25, 2022

By Erik Hovenkamp (USC Gould School of Law)

The most pressing debates in antitrust today center on major platforms like Amazon, Google, and Facebook. Platform markets are subject to strong network effects, which tend to create barriers to entry and reinforce market power. In many such markets, the most viable way for a new platform to enter is to differentiate itself from the leading incumbent in some way, such as by offering exclusive content or features. However, recently some dominant platforms have attempted to prevent this using restrictive “most favored nation” (MFN) agreements with trading partners. But unlike traditional MFNs, which restrain what prices a trading partner can charge, these MFNs prohibit trading partners from offering any exclusive content, features, or other services to smaller platforms. This can make it difficult or impossible for a new platform to differentiate itself from the market leader.

These MFNs have not previously been examined in academic research, despite being the subject of numerous ongoing lawsuits and regulatory probes involving major platforms, including Amazon. This article fills that gap. The primary antitrust concern is that the MFNs restrain product differentiation by market entrants. This may force new platforms to compete on the basis of sheer size, as opposed to the type of content they offer. Due to strong network effects, this can make entry impossible, thus cementing the leading platform’s dominance. The agreements may also diminish innovation by discouraging productive collaborations between new platforms and trading partners. I also discuss important legal issues that distinguish these contracts from traditional price-based MFNs, and I identify some key errors in recent district court decisions evaluating them.

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