The paper evaluates vertical integration in two-sided markets. Vertical integration can have anti-competitive effects driven by foreclosure and can have pro-competitive effects by eliminating double marginalization. In the two-sided market, vertical integration facilitates the expansion of product variety and the growth of the consumer base through indirect network effects. I show theoretically that the impact of vertical integration on consumer welfare highly depends on the consumer installed base which affects the indirect network effects. I develop a model of platform’s optimal pricing, third-party firms’ entry and pricing, consumer adoption and purchasing, and estimate using data on the single-serve coffee industry. Counterfactual simulations show that, in the absence of indirect network effects, the platform’s optimal decision would be setting a ten times higher licensing fee where foreclosure effects dominate. Accounting for the indirect network effect and firms’ entry, vertical integration increases consumer welfare by 0.14% due to increased product variety.
