Market Structures and Competition in System Markets
Market Structures and Competition in System Markets
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Date
2004-06-25
Authors
Kang, Kyeong-Hoon
Advisor
Vincent, Daniel R
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Abstract
The strong complementarity between components of a system makes the
competition in system markets qualitatively different from those in other
markets. When there are multiple types of systems depending on the
combinations of the components, there can be several kinds of competition in
one system market. The interaction between these competitions and its
implication for the market structure are examined in the first two chapters.
Chapter 1 finds that the competition in mixed system markets lessens the
competition between the original systems. Chapter 1 also finds that
relatively low integration and dissolution costs make the competition
between the original systems less fierce. Chapter 2 finds that the
competition in original systems' retail markets intensifies the competition
between the original systems. As a result of the interactions, consumer
surplus is the lowest and social welfare is the highest when the mixed
system markets are competitive and retail markets are monopolistic.
The last chapter examines how the complementarity between components results
in strategic abandoning of market power in system markets. In industries
where components have strong complementarity with each other, competition in
one component market directly affects competition in the other. In this
situation, an integrated manufacturer may want to abandon its duopolistic
position in one component market if this leads new entrants to the component
market to adopt its other component, and the loss from giving up the
duopolistic position in one component market is less than the gains from the
increased market share of the other component market. Though both the
duopolists may want to choose this strategy, it is also possible that the
best response to the rival's strategic abandoning of one component market is
to keep the duopolistic position in both component markets. This is because
when the duopolists both give up one component market, market shares for
them remain the same as if they kept their duopolistic positions in both
component markets. If the costs for making the retained component compatible
with the new entrants' components are high, the equilibrium is asymmetric.