Market Structures and Competition in System Markets

The strong complementarity between components of a system makes thecompetition in system markets qualitatively different from those in othermarkets. When there are multiple types of systems depending on thecombinations of the components, there can be several kinds of competition inone system market. The interaction between these competitions and itsimplication for the market structure are examined in the first two chapters.Chapter 1 finds that the competition in mixed system markets lessens thecompetition between the original systems. Chapter 1 also finds thatrelatively low integration and dissolution costs make the competitionbetween the original systems less fierce. Chapter 2 finds that thecompetition in original systems' retail markets intensifies the competitionbetween the original systems. As a result of the interactions, consumersurplus is the lowest and social welfare is the highest when the mixedsystem markets are competitive and retail markets are monopolistic.The last chapter examines how the complementarity between components resultsin strategic abandoning of market power in system markets. In industrieswhere components have strong complementarity with each other, competition inone component market directly affects competition in the other. In thissituation, an integrated manufacturer may want to abandon its duopolisticposition in one component market if this leads new entrants to the componentmarket to adopt its other component, and the loss from giving up theduopolistic position in one component market is less than the gains from theincreased market share of the other component market. Though both theduopolists may want to choose this strategy, it is also possible that thebest response to the rival's strategic abandoning of one component market isto keep the duopolistic position in both component markets. This is becausewhen the duopolists both give up one component market, market shares forthem remain the same as if they kept their duopolistic positions in bothcomponent markets. If the costs for making the retained component compatiblewith the new entrants' components are high, the equilibrium is asymmetric.