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Please use this identifier to cite or link to this item:
http://hdl.handle.net/2451/14170
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| Title: | Competing in Markets with Digital Convergence: Product Differentiation,
Platform Scope and Equilibrium Structure |
| Authors: | Mantena, Ravi
Sundararajan, Arun |
| Issue Date: | Dec-2002 |
| Publisher: | Stern School of Business, New York University |
| Series/Report no.: | IS-02-06 |
| Abstract: | The incorporation of digital technologies into the products of diverse
industries, accompanied by a shift to von-Neumann-like platform
architectures, while resulting in substantially more valuable and
flexible products, also leads to increased substitutability across
previously distinct markets. This paper analyzes the economic
implications of this trade-off in technology markets subject to digital
convergence. We present a new model of imperfect competition that
captures flexible platform scope, variability in consumer requirements,
and multiple product purchases. We specify four types of equilibrium
configurations - local monopoly, kinked, competitive and non-exclusive -
that emerge as outcomes of the model, and describe how each equilibrium
structure characterizes a distinct stage of digital convergence. Our
analysis establishes that as markets converge, prices always rise
initially even as competing products become less differentiated.
However, when platform scope is largely dictated by exogenous factors,
prices and profits eventually fall as the stage of convergence
progresses, though consumer surplus and total surplus rise. Furthermore,
while convergence has the expected effect of shifting consumption
patterns from purchasing multiple specialized products to buying a
single general-purpose product, we describe examples of equilibria in
which consumers may buy multiple general-purpose products, using each
for a specialized subset of their requirements. Pricing responses to
changes in variable costs and consumer functionality needs are also
discussed. When firms can make strategic choices of platform scope, we
show that in any subgame perfect equilibrium, duopoly prices are always
higher than monopoly prices, and industries may sustain high levels of
profitability even when their boundaries blur. We also establish that as
technological progress lowers fixed costs, a natural outcome is for
unregulated firms to over-invest in platform scope relative to the
social optimum, and that this outcome is true under both monopoly and
duopoly market structures |
| URI: | http://hdl.handle.net/2451/14170 |
| Appears in Collections: | IOMS: Information Systems Working Papers
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