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Product scope and bilateral entry deterrence in converging technology markets

Ravi Mantena and Arun Sundararajan

Last revised: July 2004

Abstract:   We analyze the bilateral threat of entry in adjacent information technology industries. In our model, firms endogenously choose product scope, which affects the extent of product differentiation for incumbent oligopolists as well as the fixed costs of a potential entrant. Our analysis establishes unique symmetric equilibrium choices of scope and price, both in the absence and the presence of an entry threat. When entry is threatened bilaterally, in equilibrium, firms may symmetrically either deter entry into their core industry, or accomodate it while entering the neighboring industry. We show how even in the absence of technological shocks, steady progress in technology can result in switching between these equilibria, leading to the periodic and sudden shifts in industry concentration and firm profitablity; such shifts have been observed during the "competitive crash" in the computer industry, and more recently, on account of digital convergence.

JEL Codes: D43, L11, L13, L49

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