Complementing Substitutes: Bundling, Compatibility, and Entry
51 Pages Posted: 1 Jul 2009 Last revised: 30 Mar 2011
Date Written: June 5, 2009
In this paper we study price competition, equilibrium market configurations and entry when firms compete in vertically-di¤erentiated markets producing complementary goods. We consider two complements and start from a configuration where the market for one complement is a duopoly, whereas the other is a monopoly. In such framework, when products are highly di¤erentiated, the low-quality duopolist is always pushed out. We then allow for competition between complements on both sides of the market: one of the duopolists starts to produce also the other complement and decides whether to offer its two products as a bundle or to allow consumers to combine them with complements from other producers. We prove that this strategy always allows the low-quality duopolist to stay in the market, no matter if the duopolist producing both complements is the high or the low-quality one. Moreover, this strategy always increases consumer surplus, even when the duopolist sells the two complements only as a bundle.
Keywords: complements, bundling, anticommons, antitrust, integration, vertical differentiation
JEL Classification: C7, D42, D43, K21, L11, L12, L13, L40, M21
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