In-house publishing and competition in the video game industry

This paper analyzes two-sided competition in the video game industry. Video game platforms compete for software publishers and gamers and may invest into in-house publishing of own software (games) before they enter competition. Such investments affect the strength of the indirect network externalities between gamers and publishers in equilibrium. If publishers multihome, i.e., if they can release games for multiple platforms, and gamers singlehome, i.e., if they use only a single platform, in-house games reduce the profits obtained by platforms in equilibrium. Consequently, one may suppose that they refrain from investing into in-house games. However, the analysis reveals that an equilibrium where platforms credibly commit to do so cannot be sustained, transforming the game into a prisoner’s dilemma. This no longer holds if gamers also multihome, granting monopoly power to platforms on both sides of the market. The benefit obtained by gamers and the level of social welfare are always enhanced with in-house publishing. JEL classification: D43, L13, L86