Product Scope and Bilateral Entry Deterrence in Converging Technology Industries

Abstract

We model the bilateral threat of entry between firms in two industries, which is characteristic of a number of IT industries. An endogenous choice of product scope by firms in each industry affects both the extent of product differentiation for incumbent oligopolists as well as the fixed costs of a potential entrant. Our analysis establishes unique symmetric equilibrium choices of scope and price, both in the absence and the presence of an entry threat. When entry is threatened bilaterally, in equilibrium, firms may symmetrically either deter entry into their core industry, or accomodate it while entering the neighboring industry. Even in the absence of technological shocks, we show how steady progress in technology can result in switching between these equilibria, leading to the periodic and sudden shifts in industry concentration and firm profitability; such shifts have been observed during the "competitive crash" in the computer industry, and more recently, on account of digital convergence.