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Third Party Complements and Market Entry

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  • Akihiro Okumura

Abstract

This paper considers two types of components, main and peripheral, both indispensable for consumption. There are two first‐party incumbent firms, each producing the two components, and one potential third‐party entrant that would supply only the peripheral one. By using a two‐dimensional Hotelling model, I show that entry takes place if the peripheral component is sufficiently differentiated. Furthermore, entry of the potential entrant does not harm the incumbents. It can even be beneficial when the entrant captures consumers that were not participating in the market, as it generates additional demand for the incumbents. Finally, entry is efficient for society due to a significant increase in the consumer surplus, while the expected profit of the third party does not cover its entry cost for some parameter values. In this case, government intervention to encourage the third party to enter the market may be desirable.

Suggested Citation

  • Akihiro Okumura, 2020. "Third Party Complements and Market Entry," Manchester School, University of Manchester, vol. 88(2), pages 349-372, March.
    • Handle: RePEc:bla:manchs:v:88:y:2020:i:2:p:349-372
    DOI: 10.1111/manc.12279
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    Cited by:

    1. Hui‐Ling Chung & Jin‐Li Hu & Yan‐Shu Lin, 2022. "The leverage effect of bundling on monopoly power and product quality," Manchester School, University of Manchester, vol. 90(6), pages 668-688, December.

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