Strategic entry deterrence: Complementary products as installed base

Abstract

In this paper, we assess the effect of hardware control of software provision in markets in which the consumption benefit of a durable or hardware good is a function of the variety of complementary products or software available. We show that when an incumbent can commit to an installed base of software, the market outcome is socially inefficient. When the difference between the monopoly and duopoly prices of the incumbent (the monopoly premium) is small, the strategic behaviour on the part of the incumbent will result in either de facto standardization on the technology of the incumbent or an equilibrium where both hardware technologies are viable, even though the socially preferred outcome is standardization on the technology of the entrant. When the monopoly premium is large, the technology of the incumbent will be the market standard, even though the socially preferred outcome is either standardization on the technology of the entrant or a variety outcome.