Entry into Complementary Good Markets with Network Effects

Abstract

Network effects and complementarities are salient features of the digital economy. We examine whether complementarities can help a firm enter a market with strong network effects and incumbency advantages. We provide conditions under which bundling the network good with a complementary good can be an optimal entry strategy, and we show that this strategy should not be subject to anticompetitive concerns (in both the short and the long term). When product complementarity is weak enough, we also show that an entrant may prefer a more cooperative approach not based on bundling but rather on extending the complementarity benefits to the incumbent's network good.