Who should be regulated: Genuine producers or third parties?

This study develops a model in which a “genuine” producer supplying genuine products competes with competitive “third-party” producers supplying compatible third-party products. We use this model to examine (i) how the strategic behavior of the genuine producer to drive out third parties (running comparative advertising, establishing technical barriers) affects the market equilibrium, (ii) whether the government should regulate such behavior by the genuine producer, and (iii) whether the government should regulate the entry of firms that supply third-party products. We find that a small amount of spending on advertising and creating technical barriers improves social welfare. However, their amounts in market equilibrium are socially excessive because the negative effects (e.g., the cost of advertising and creating barriers and an increase in production cost for third parties) outweigh the positive effects (e.g., an increase in the consumption of the genuine product and mitigation of the distortion of insufficient supply). Furthermore, we find that prohibitive measures (e.g., prohibition of advertising and technical barriers, entry prohibition of third-party producers) may improve welfare.