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Equilibrium Foreclosure and Complementary Products

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  • Church, J.
  • Gandal, N.

Abstract

In this paper we address the possibility of horizontal foreclosure in markets for complementary services (software) where the consumption value of durables (hardware) depends on the availability of software. Horizontal foreclosure occurs when a hardware firm merges with a software firm and the integrated firm ceases to supply compatible software for a rival technology. We find that horizontal foreclosure can be an equilibrium outcome where both the merger and compatibility decisions are part of a multistage game which permits the foreclosed firm to play a number of counter- strategies. Moreover, foreclosure may result in monopolization of the hardware market. We find that the foreclosure equilibrium is inefficient: total surplus would be higher without foreclosure.
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Suggested Citation

  • Church, J. & Gandal, N., 1993. "Equilibrium Foreclosure and Complementary Products," Papers 3-93, Tel Aviv - the Sackler Institute of Economic Studies.
    • Handle: RePEc:fth:teavsa:3-93
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    Cited by:

    1. Norbäck, Pehr-Johan & Persson, Lars & Tå̊g, Joacim, 2014. "Acquisitions, entry, and innovation in oligopolistic network industries," International Journal of Industrial Organization, Elsevier, vol. 37(C), pages 1-12.
    2. Amisano, Franco & Cassone, Alberto, 2005. "Proprieta' intellettuale e mercati: Il ruolo della tecnologia e conseguenze microeconomiche," POLIS Working Papers 58, Institute of Public Policy and Public Choice - POLIS.
    3. Church, Jeffrey & Gandal, Neil, 1996. "Strategic entry deterrence: Complementary products as installed base," European Journal of Political Economy, Elsevier, vol. 12(2), pages 331-354, September.

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