Key Points

• Regulars and pundits are increasingly recognizing how digital platforms that benefit from network effects can engage in a sort of long-term predatory pricing on quality.
• First, they offer sleek interfaces and competitive terms for businesses in order to build up a large base of users.
• Once enough people are using the platform, the terms and user experience changes for the worse as the platforms move to extract value from their market power.
• Reddit’s recent increase in API fees (which are charged to third party apps for automated requests for Reddit’s content) is not just another example of this phenomenon – it also shows how digital platforms can use market power to fuel anticompetitive vertical integration.

Reddit’s Price Increases

According to a popular line of analysis, memorably termed “Enshittification” by the tech pundit Cory Doctorow, digital platform services such as Amazon, Facebook, Google have grown steadily worse for users over past 20 years.¹ According to this view, online platforms initially make themselves as attractive as possible to users, even if this means operating at a loss, to increase market share. Once the platform reaches a certain critical mass, network effects kick in – when everyone must continue to use a platform because everyone else does – and aggressive competition for users is no longer necessary.² With users captive, the platform can look for ways to extract value from its market power. Paywalls go up, advertisements increase in frequency, personal data is harvested, and “sponsored” search results begin to displace organic content.

Reddit’s recent conduct is an example of this phenomenon. After gaining popularity from user-generated-and-moderated content, Reddit became one of the biggest social networks in the world with 430 million users.³ In April 2023, Reddit announced it would start charging app developers for bulk access requests to its public content, which had previously been free of charge. The new policy was widely criticized by long-time Reddit users, which led to boycotts.

In July of this year, the independent app developer Christian Selig announced that his business was not going to be commercially viable under Reddit’s new access fee scheme. Selig operated a popular mobile app called Apollo, which provided an alternative interface for browsing Reddit that many users preferred to Reddit’s own proprietary app. Reddit’s new fees for Apollo meant that Selig would need to pay $12,000 for every 50 million API requests to Reddit’s website to view content. By comparison, the same number of requests to Imgur – another social network like Reddit – would cost $166.⁴ Ironically, Selig made this announcement on the platform then known as Twitter, which at the same time was in the process of eliminating all third-party applications and then increasing the price of access by new third-party developers.⁵

Corporate leadership at Reddit and Twitter’s justified these actions by pointing to the emergence of platforms like ChatGPT, which they claim dramatically increased the demand for data as part of large language model training. But claiming that the changed API fee simply reflected a shock in demand not only overlooks wider considerations about market power. It also misses the implications for Reddit’s own downstream competitors.

The Vertical Dimensions Of Market Power

Unambitious monopolists may content themselves with extracting rents in their own market. But others are empire-builders, attempting to extend their dominance over one market outward into another. This often takes the form of vertical integration: expansion downstream into the market that the monopolist supplies, or expansion upstream into the market that supplies the monopolist.

When a firm controls the supply of a key input that an entire market relies on, it can shut down competitors by giving its own business preferential access. In competition economics, this is referred to as input foreclosure. Increase costs for rivals allows a firm’s downstream arm to offer prices that rivals cannot profitably meet. If sustained, input foreclosure can guarantee dominance for the foreclosing firm. This advantage is not achieved through innovation or efficiency, buy simply from a strategic affiliation with the supplier.

Reddit resembles this kind of integrated firm, controlling both the data created by the Reddit platform (the upstream product) and their own mobile app (the downstream product). These are different markets, facing different constraints and competitors. Third party developers are downstream providers and put competitive pressure on Reddit to improve their navigation app. Because they provide alternative interfaces to Reddit content, they have no choice but to accept Reddit’s prices and conditions.

This goes beyond merely squeezing value from a captive market, as losing developers means eroding the value of Reddit itself as a content platform for its users. But the downsides of only being able to use the proprietary app are clear. Third-party competitors neither served ads nor collected user data to the extent that Reddit’s proprietary app does. In this way they offered an alternative to users who value privacy over targeted ads. Additionally, third party apps compete by offering a higher quality interface and additional features. For example, they may include accessibility features that first party apps have no incentives to provide. Disabled Reddit users relied on third party apps that provided an interface they could use, and many of these apps were shut down due to the API changes.⁶

The Need For Platform Competition

Users of these platforms are familiar with the pattern of Enshittification. It should not be surprising to competition economists, who hold that market power leads to rents.⁷ The extraction of rents may take the form of declining quality on the user side, or it may take the form of higher prices on the business side. Either way, the principle is the same. When competition dries up and market power is established, the question is not whether dominant firms will exploit their position, but how hard they can squeeze users and business customers.

Although it remains to be seen how each of the platforms will fare in the long run, recent events at Reddit and Twitter (now rebranded as “X”) do offer two different examples of how market power and competition can function. Given its central place in politics and media, Twitter has long been seen as an irreplaceable platform despite troubled finances. But perhaps somewhat surprisingly, Reddit’s market power appears more durable.

When Reddit increased its fees, moderators of some of the larger pages on Reddit staged a blackout in protest of Reddit’s behavior, effectively taking the platform offline.⁸ This boycott ended up being largely ineffective, as Reddit simply replaced moderators who refused to bring the pages back.⁹ So far, the blackout seems to have accomplished little and Reddit’s decision to raise the price of API access has forced at least five mobile apps in the downstream market to close shop.¹⁰

Meanwhile, frustration with the changes brought to Twitter by Elon Musk, its recent purchaser, appears to have been enough to drive significant number of users and advertisers to leave the platform.¹¹ Tentative competition has even broken out, in the form of Meta’s copycat service Threads and a wider decentralized “fediverse” of cross-compatible smaller services.¹² in the face of this competitive pressure, Twitter has announced a new profit-sharing scheme, to retain advertisers and content creators.¹³

Twitter and Reddit have been widely publicized recent examples, but it is not only in social media space that entrenched digital platform operators are attempting to cannibalize the competitive third-party businesses that helped bring value to their platforms in the first place. In these newly monopolized downstream markets, meanwhile, the familiar results of insufficient competition emerge – an Enshittified market with fewer choices, higher prices, and lower quality.

¹ https://www.wired.com/story/tiktok-platforms-cory-doctorow/

² In the case of Twitter and Reddit, the immediate network effects are compounded by the archival nature of the platform. A user to switch to a competing platform since they would be losing years of information and interaction.

³ https://earthweb.com/how-many-people-use-reddit/ 

⁴ https://www.macrumors.com/2023/05/31/reddit-api-changes-pricing-apollo/

⁵ https://techcrunch.com/2023/01/19/twitter-officially-bans-third-party-clients-after-cutting-off-prominent-devs/

⁶ Why disabled users joined the Reddit blackout – The Verge

⁷ A brief treatment of the extensive academic literature on this topic can be found here Predatory Pricing in Two-Sided Markets: A Brief Comment by Amelia Fletcher :: SSRN

⁸ https://www.theverge.com/2023/6/12/23755974/reddit-subreddits-going-dark-private-protest-api-changes

⁹ https://www.theverge.com/23779477/reddit-protest-blackouts-crushed

¹⁰ These included Apollo, Sync for Reddit, Bacon Reader, RIF (Reddi is Fun) and ReddPlanet. See https://mashable.com/article/reddit-third-party-apps-shutting-down-apollo-relay-baconreader

¹¹ https://www.cnn.com/2023/02/10/tech/twitter-top-advertiser-decline/index.html

¹² https://www.wired.com/story/metas-threads-could-make-or-break-the-fediverse/

¹³ https://www.theverge.com/2023/7/28/23811535/x-twitter-ads-revenue-sharing-program-creators