Entry into complementary good markets with network effects

We examine whether an incumbent active in a market with strong network effects can be challenged by an entrant already active in the market of a complementary good. When only the entrant benefits from such a complementarity in the network market, we find that it can conquer such a market if and only if the degree of complementarity is large enough. In such cases, the entrant may use the network good as a loss-leader so as to expand the market of the complementary good. When the incumbent's network good is enhanced too by the existence of the complementary good, we study if the entrant is better or worse off. Finally, we argue that, even though pure bundling may be an effective entry strategy and it may be socially desirable, it may be harmful for the entrant to use it.