On the economics of the Android case

Abstract:

We provide an economic rationalization for concerns that restrictions in the contracts between Google and manufacturers of mobile devices based on the Android operating system have anti-competitive effects. We extend recent insights on tying in two-sided markets (by Choi and Jeon), showing that tying of Google’s app store with its search app (and revenue sharing agreements which compensate manufacturers for exclusivity) can protect and increase Google’s profits from search advertising, and help it outbid or marginalize other search engines.

Two-sidedness with some pricing constraint on the Google suite can “break” the “One Monopoly Profit” paradigm – even with linear pricing for the Google Suite under heterogeneous consumers. While it is not possible for Google to extract all consumer surplus from the app store as a standalone product, part of this surplus can be extracted through the tying strategy, which shifts additional profits towards the dominant firm and reduces consumer welfare.