Entry into Complementary Good Markets with Network Effects

60 Pages Posted: 11 Oct 2016  

Gastón Llanes

Pontificia Universidad Católica de Chile

Andrea Mantovani

University of Bologna

Francisco Ruiz-Aliseda

Pontifical Catholic University of Chile

Date Written: September 30, 2016

Abstract

We study whether complementarities can help a firm enter a market with strong network effects and incumbency advantages. We find 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 find that the entrant always prefers to make the complementarity general (so that the incumbent benefits from it as well) over having a firm-specific 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 specific (general). Finally, we find that bundling may be socially optimal because it allows entrants to challenge incumbents in markets with network effects, thereby expanding the complementary benefits enjoyed by consumers. This finding 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.

Suggested Citation

Llanes, Gastón and Mantovani, Andrea and Ruiz-Aliseda, Francisco, Entry into Complementary Good Markets with Network Effects (September 30, 2016). NET Institute Working Paper No. 16-12. Available at SSRN: https://ssrn.com/abstract=2848539 or http://dx.doi.org/10.2139/ssrn.2848539

Gaston Llanes (Contact Author)

Pontificia Universidad Católica de Chile ( email )

Vicuna Mackenna 4860
Santiago
Chile

Andrea Mantovani

University of Bologna ( email )

Piazza Scaravilli 2
Bologna, 40126
Italy

Francisco Ruiz-Aliseda

Pontifical Catholic University of Chile ( email )

Vicuna Mackenna 4860
Santiago, 99999
Chile

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