Multilayer Two-Sided Platforms: The Role of Exclusive Contracts

Mobile platforms are multilayer in the sense that application developers can access the users only through the two layers of the platform, namely operating systems (OS) and the carrier. Therefore, mobile platforms require contracting between OS and carrier as no firm has ability to connect both the layers of the platform. We develop a framework to study multilayer two-sided platforms and then examine the optimality of an exclusive contract by an entrant OS firm when the incumbent OS firm has non-exclusive contracts, such as Apple launching the iPhone when Blackberry was widely available. We show that exclusive contracts benefit entrant firm only if users have strong preferences for OSes, and paradoxically users benefit if developers enjoy weak cross-side network effects from those users. We also study the implications of exclusive contracts on social welfare and its implications for competition.