Holdup, innovation, and platform governance

Ethan Bueno de Mesquita

Platforms must attract innovative content producers to thrive. But content producers may be reluctant to invest in innovative new products because of the potential for hold-up by the platform. Once a content producer innovates a product for one platform, they may be partially locked in to that platform due to network effects, failures of interoperability, or search costs. Platforms exploit this lock-in by increasing fees, eroding the content producer’s rents. Anticipation of such hold-up deters surplus generating innovations by content producers. A platform can mitigate this problem with governance.

In this presentation, Ethan Bueno de Mesquita (Chicago) considers a model of two competing platforms seeking to attract both consumers and a content producer. Ethan analyzes when the winning platform will successfully induce the content producer to invest in generating a high-quality product. He shows that there is a hold-up problem: platform fees increase over time because of lock-in and, as a consequence, the content producer sometimes does not invest in surplus-generating innovations. If a platform can commit to a governance solution that gives content producers a veto over fee changes, it can increase platform profits and increase investment in innovation, although innovation remains below the social optimum. The platform’s willingness to pay for such a governance solution is non-monotone in the social value of the innovation.

About the speaker

Ethan Interim Dean of the Harris School of Public Policy, the Sydney Stein Professor in the Harris School, and a professor in the College at the University of Chicago. His research focuses on applications of game theoretic models to political phenomena, including conflict, political violence, national security, and electoral accountability. He has also written extensively on methodological issues in the social sciences, and both writes and advises on issues at the intersection of tech and society.

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