Tuesday, December 13, 2016

Entry into Complementary Good Markets with Network Effects

Gaston Llanes, Pontificia Universidad Católica de Chile, Andrea Mantovani, University of Bologna, and Francisco Ruiz-Aliseda, Pontifical Catholic University of Chile examine Entry into Complementary Good Markets with Network Effects.

ABSTRACT: We study whether complementarities can help a €rm enter a market with strong network e‚ffects and incumbency advantages. We fi€nd that bundling the network good with a complementary good, or using the network good as a loss leader (i.e., pricing below marginal cost) can facilitate entry, but that these strategies involve costs that may render them undesirable for the entrant. We also fi€€nd that the entrant always prefers to make the complementarity general (so that the incumbent benefi€€ts from it as well) over having a fi€€rm-specifi€€c complementarity and using a loss leading strategy. Pricing and product design strategies are interdependent: bundling (unbundled pricing) should be used if and only if the complementarity is specifi€€c (general). Finally, we €fi€nd that bundling may be socially optimal because it allows entrants to challenge incumbents in markets with network e‚ffects, thereby expanding the complementary benefi€€ts enjoyed by consumers. ThŒis fi€€nding contrasts wit the standard view of regulators, who see bundling as a way to foreclose entry and prevent competition, as in the recent case of the European Commission vs. Google.




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