Competing on Many Fronts: Entry Networks in an Economy of Multi-Product Firms

We consider an economy with n distinct firms, each of which has a unique set of core competencies and thus initially serves its home product market as a monopolist. We then allow for informational spillovers, enabling firms to acquire foreign competencies in order to enter other product markets. Upon entry a firm has to invest sunk costs and is, of course, only willing to do so if it believes that post-entry profits will exceed the entry costs. Conversely, an entrant’s home market may also be threatened by entry. This assumption is new to the industrial organization literature and gives among other effects rise to a prisoners’ dilemma. As a consequence, we can formally establish the result that firms tend to overcompete when operating on many markets. Thus, one implication of the model is that multi-market competition has positive effects on consumers’ surplus.