In Cournot's model of complements, the producers of A and B are both monopolists. This paper extends Cournot's model to allow for competition between complements on one side of the market. Consider two complements, A and B, where the A+B bundle is valuable only when purchased together. Good A is supplied by a monopolist(e.g., Microsoft) and there is competition in the B goods from vertically differentiated suppliers (e.g., Intel and AMD). In this simple game, there may not be a pure-strategy equilibria. In the standard case where marginal costs are weakly positive, there is no pure strategy where the lower quality B firm obtains positive market share. We also consider the case where A has negative marginal costs, as would arise when A can expect to make upgrade sales to an installed base. When profits from the installed base are sufficiently large, a pure strategy equilibrium exists with two B firms active in the market. Although there is competition in the complement market, the monopoly Firm A may earn lower profits in this environment. Consequently, A may prefer to accept lower future profits in order to interact with a monopolist complement in B.
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- Choi, Jay Pil & Stefanadis, Christodoulos, 2001. "Tying, Investment, and the Dynamic Leverage Theory," RAND Journal of Economics, The RAND Corporation, vol. 32(1), pages 52-71, Spring.
- Dennis W. Carlton & Michael Waldman, 1998.
"The Strategic Use Of Tying To Preserve And Create Market Power In Evolving Industries,"
University of Chicago - George G. Stigler Center for Study of Economy and State
145, Chicago - Center for Study of Economy and State.
- Dennis W. Carlton & Michael Waldman, 2002. "The Strategic Use of Tying to Preserve and Create Market Power in Evolving Industries," RAND Journal of Economics, The RAND Corporation, vol. 33(2), pages 194-220, Summer.
- Dennis W. Carlton & Michael Waldman, 1998. "The Strategic Use of Tying to Preserve and Create Market Power in Evolving Industries," NBER Working Papers 6831, National Bureau of Economic Research, Inc.
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