Strategic entry deterrence: Complementary products as installed base

Jeffrey Church, Neil Gandal*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

Abstract

In this paper, we assess the effect of hardware control of software provision in markets in which the consumption benefit of a durable or hardware good is a function of the variety of complementary products or software available. We show that when an incumbent can commit to an installed base of software, the market outcome is socially inefficient. When the difference between the monopoly and duopoly prices of the incumbent (the monopoly premium) is small, the strategic behaviour on the part of the incumbent will result in either de facto standardization on the technology of the incumbent or an equilibrium where both hardware technologies are viable, even though the socially preferred outcome is standardization on the technology of the entrant. When the monopoly premium is large, the technology of the incumbent will be the market standard, even though the socially preferred outcome is either standardization on the technology of the entrant or a variety outcome.

Original languageEnglish
Pages (from-to)331-354
Number of pages24
JournalEuropean Journal of Political Economy
Volume12
Issue number2
DOIs
StatePublished - Sep 1996

Keywords

  • Complementary products
  • Installed base
  • Network externalities
  • Standardization

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