Market Structures and Competition in System Markets

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2004-06-25

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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.

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