Product Scope and Entry Deterrence in Technology Markets

Abstract

We model an oligopolistic technology market in which firms endogenously choose product scope, fixed costs are affected by exogenous technological progress, and there may be threat of entry. Our analysis shows that equilibrium outcomes involve substantial overinvestment in product scope, which benefit consumers and hurt firms, relative to the social optimum. Technological progress generally increases consumer surplus and lowers firm profits. If entry is threatened bilaterally across two converging markets, both either accommodate entrants from the rival market, or both deter entry; continuous progress in technology can cause equilibria shifts, leading to discontinuous and radical redistribution of surplus across markets.