Non-User Externalities and Market Power

Firms can increase the demand for their products and consolidate their market power by increasing their users’ utility but also by strategically creating negative externalities for competing products’ users. We study this mechanism in the smartphone market, analyzing Apple’s strategy of marking messages to Android users with distinctive “green bubbles.” In surveys with U.S. college students, we show that green bubbles are widely stigmatized and that a majority of both iPhone and Android users would prefer they were removed. An incentivized deactivation experiment reveals that iPhone users require substantial compensation to have their messages appear as green bubbles on other iPhones. Exploiting uncertainty around the DOJ case against Apple, we show that removing green bubbles shifts choices from iPhone to Android. Finally, we document the prevalence of non-user externalities and analyze their implications across a variety of product features.