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The success of late entrants in many digital markets suggests network and lock-in effects, albeit important market forces in most digital markets, do not confer sustainable firstmover advantages. In our analysis we suggest exclusionary practices may play a major role explaining the rise of “winner-takes-it-all” markets on the Internet. The entry deterrence literature has extensively analyzed incumbents' strategic moves in order to make market entry unprofitable or, at least, to minimize the harm that entry causes. In our paper we propose a richer theoretical framework allowing both the incumbent as well as a new entrant to carry out strategic investments. Those allow the incumbent to deter market entry, but also the new entrant to squeeze the incumbent out of the market. We find that competitive advantage and strategic interaction determine a “winner-takes-it all” or a duopoly market outcome. If neither player enjoys a clear-cut cost or demand advantage, a duopoly market outcome will emerge. However, for both incumbent and new entrant there is a strong incentive to complement a possible competitive advantage with exclusionary practices in order to monopolize a market and increase profits. This result suggests “winner-takes-it-all” market results on the Internet may result from exclusionary practices, nourishing antitrust concerns with today's major Internet players’ market dominance.
6. Concluding remarks
In this paper, we have analyzed the impact of new entrant's strategic investments in a dynamic duopoly with sequential entry. Competitive advantage and strategic interaction determine a “winner-takes-it all” or a duopoly market outcome. With marketing expenditures as a strategic investment, both incumbent and new entrant can commit to exclusionary strategies: the incumbent may deter entry, or the new entrant may squeeze the incumbent out of the market. We find that clear-cut cost and/or demand advantages favor a “winner-takes-it-all” market outcome. Further on, strategic investment is a powerful instrument to influence market outcome: Strategic investment allows a strong incumbent to deter market entry, and vice versa it allows a strong new entrant to squeeze the incumbent out of the market. Depending on relative cost and demand advantages, the incumbent will choose one of five generic strategies: early withdrawal, squeeze-out prevention, entry accommodation, entry deterrence, dynamic monopoly solution.