Exclusionary Strategies and the Rise of Winner-Takes-It-All Markets on the Internet

14 Pages Posted: 29 Oct 2015

See all articles by Bjoern A. Kuchinke

Bjoern A. Kuchinke

Ilmenau University of Technology

Miguel Vidal

Deutsche Telekom AG

Date Written: October 29, 2015

Abstract

The success of late entrants in many digital markets suggests network and lock-in effects, albeit important market forces in most digital markets, do not confer sustainable first-mover advantages. In our analysis we suggest exclusionary practices may play a major role explaining the rise of "winner-takes-it-all" markets on the Internet. The entry deterrence literature has extensively analyzed incumbents’ strategic moves in order to make market entry unprofitable or, at least, to minimize the harm that entry causes. In our paper we propose a richer theoretical framework allowing both the incumbent as well as a new entrant to carry out strategic investments. Those allow the incumbent to deter market entry, but also the new entrant to squeeze the incumbent out of the market. We find that competitive advantage and strategic interaction determine a "winner-takes-it all" or a duopoly market outcome. If neither player enjoys a clear-cut cost or demand advantage, a duopoly market outcome will emerge. However, for both incumbent and new entrant there is a strong incentive to complement a possible competitive advantage with exclusionary practices in order to monopolize a market and increase profits. This result suggests "winner-takes-it-all" market results on the Internet may result from exclusionary practices, nourishing antitrust concerns with today’s major Internet players’ market dominance.

Keywords: industrial organization, competition policy, market entry, strategic investment, first-mover advantage, digital economy

JEL Classification: C70, L10, L26, M30

Suggested Citation

Kuchinke, Bjoern A. and Vidal, Miguel, Exclusionary Strategies and the Rise of Winner-Takes-It-All Markets on the Internet (October 29, 2015). Available at SSRN: https://ssrn.com/abstract=2683372 or http://dx.doi.org/10.2139/ssrn.2683372

Bjoern A. Kuchinke

Ilmenau University of Technology ( email )

Germany

Miguel Vidal (Contact Author)

Deutsche Telekom AG ( email )

Friedrich-Ebert Allee 140
Bonn, 53113
Germany

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