Abstract
This paper considers two types of components, main and peripheral, both indispensable for consumption. There are two first‐party incumbent firms, each producing the two components, and one potential third‐party entrant that would supply only the peripheral one. By using a two‐dimensional Hotelling model, I show that entry takes place if the peripheral component is sufficiently differentiated. Furthermore, entry of the potential entrant does not harm the incumbents. It can even be beneficial when the entrant captures consumers that were not participating in the market, as it generates additional demand for the incumbents. Finally, entry is efficient for society due to a significant increase in the consumer surplus, while the expected profit of the third party does not cover its entry cost for some parameter values. In this case, government intervention to encourage the third party to enter the market may be desirable.
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