Competing in Markets with Digital Convergence: Product Differentiation, Platform Scope and Equilibrium Structure

62 Pages Posted: 13 Oct 2008

See all articles by Ravi Mantena

Ravi Mantena

University of Rochester - Simon Business School

Arun Sundararajan

New York University (NYU): Stern School of Business and Center for Data Science

Date Written: December 2002

Abstract

The incorporation of digital technologies into the products of diverse industries, accompaniedby a shift to von-Neumann-like platform architectures, while resulting in substantially more valuableand flexible products, also leads to increased substitutability across previously distinct markets. This paperanalyzes the economic implications of this trade-off in technology markets subject to digital convergence.We present a new model of imperfect competition that captures flexible platform scope, variability in consumerrequirements, and multiple product purchases. We specify four types of equilibrium configurations- local monopoly, kinked, competitive and non-exclusive - that emerge as outcomes of the model, anddescribe how each equilibrium structure characterizes a distinct stage of digital convergence.Our analysis establishes that as markets converge, prices always rise initially even as competing productsbecome less differentiated. However, when platform scope is largely dictated by exogenous factors, pricesand profits eventually fall as the stage of convergence progresses, though consumer surplus and totalsurplus rise. Furthermore, while convergence has the expected effect of shifting consumption patternsfrom purchasing multiple specialized products to buying a single general-purpose product, we describeexamples of equilibria in which consumers may buy multiple general-purpose products, using each fora specialized subset of their requirements. Pricing responses to changes in variable costs and consumerfunctionality needs are also discussed.When firms can make strategic choices of platform scope, we show that in any subgame perfect equilibrium,duopoly prices are always higher than monopoly prices, and industries may sustain high levels ofprofitability even when their boundaries blur. We also establish that as technological progress lowers fixedcosts, a natural outcome is for unregulated firms to over-invest in platform scope relative to the socialoptimum, and that this outcome is true under both monopoly and duopoly market structures

Suggested Citation

Mantena, Ravi and Sundararajan, Arun, Competing in Markets with Digital Convergence: Product Differentiation, Platform Scope and Equilibrium Structure (December 2002). Information Systems Working Papers Series, Vol. , pp. -, 2002. Available at SSRN: https://ssrn.com/abstract=1283012

Ravi Mantena (Contact Author)

University of Rochester - Simon Business School ( email )

Rochester, NY 14627
United States

Arun Sundararajan

New York University (NYU): Stern School of Business and Center for Data Science ( email )

44 West 4th Street, KMC 8-90
New York, NY 10012
United States

HOME PAGE: http://digitalarun.ai/

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