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Entry into complementary good markets with network effects

Author

Listed:
  • Gaston Llanes

    () (Pontificia Universidad Catolica de Chile, Escuela de Administracion, Vicuna Mackenna 4860, Macul, Santiago, Chile)

  • Andrea Mantovani

    () (Department of Economics, University of Bologna, Strada Maggiore 45, 40125 Bologna, Italy)

  • Francisco Ruiz-Aliseda

    () (Pontificia Universidad Catolica de Chile, Escuela de Administracion, Vicuna Mackenna 4860, Macul, Santiago, Chile)

Abstract

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.

Suggested Citation

  • Gaston Llanes & Andrea Mantovani & Francisco Ruiz-Aliseda, 2016. "Entry into complementary good markets with network effects," Working Papers 16-12, NET Institute.
  • Handle: RePEc:net:wpaper:1612
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    File URL: http://www.netinst.org/Llanes_16-12.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    network effects; complementarities; bundling; incumbency advantage; entry;

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices

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