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|Title: ||Competing in Markets with Digital Convergence: Product Differentiation, Platform Scope and Equilibrium Structure|
|Authors: ||Mantena, Ravi|
|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|
|Appears in Collections:||IOMS: Information Systems Working Papers|
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