Entry deterrence, domino effects and mergers in markets for complements

Paolo Ramezzana

International Journal of Industrial Organization, 2025, vol. 99, issue C

Abstract: This paper studies entry deterrence through exclusive contracts in markets for complementary components. When two components are produced by independent incumbents that both face entry threats, the incumbents' entry deterrence actions are strategic complements for a broad set of demand functions. As a result, when entry costs are sufficiently similar in the two components, in equilibrium entry is deterred in both components or in none. Thus, policy interventions that focus on promoting entry in a single component can have domino effects that lead to entry in all components. A merger between the incumbents allows for more efficient pricing of the system relative to a bilateral monopoly and, through this channel, increases the joint profits that the incumbents can earn if they deter entry. For intermediate levels of entry costs, this implies that the incumbents deter entry only if they are merged and thus, in an example of an “efficiency offense”, that the merger increases prices and lowers welfare. For sufficiently high entry costs, instead, entry is deterred even without the merger and the only effect of the merger is to lower prices and increase welfare.

Keywords: Entry deterrence; Complements; Exclusive contracts; Mergers; Efficiency offense (search for similar items in EconPapers)
JEL-codes: L12 L41 L42 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:indorg:v:99:y:2025:i:c:s0167718725000128

DOI: 10.1016/j.ijindorg.2025.103145

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