Actions a ﬁrm takes in one market may aﬀect its proﬁtability in other markets, beyond any joint economies or diseconomies in production. The reason is that an action in one market, by changing marginal costs in a second market, may change competitors’ strategies in that second market. We show how to calculate the strategic consequences in market 2, of a change in conditions in market 1 or of a ﬁrm’s action in market 1. Qualitatively, the same results hold for both simultaneous markets and sequential markets: whether a more aggressive (i.e., lower price or higher quantity) strategy in the ﬁrst market provides strategic costs or beneﬁts depends on (a) whether competitors’ products are strategic substitutes or strategic complements. The latter distinction is determined by whether more aggressive play by one ﬁrm in a market raises or lowers competing ﬁrms’ marginal proﬁtabilities in that market. We discuss applications to how ﬁrms select “portfolios” of businesses in which to compete, to rational retaliation as a barrier to entry, to international trade, and to the learning curve. Both strategic substitutes competition and strategic complements competition are compatible with either quantity competition or price competition. For example, strategic complements competition arises from price competition with linear demand and from quantity competition with constant elasticity demand. The distinction between strategic substitutes and strategic complements is also important in other areas of industrial organization. For example, we show that with strategic complements competition ﬁrms will strategically underinvest in ﬁxed costs. This contrasts with earlier studies which, focusing on the total proﬁts of potential entrants rather than the marginal proﬁts of established competitors, invariably emphasized the use of excess capacity.
Bulow, Jeremy I.; Geanakoplos, John; and Klemperer, Paul D., "Multimarket Oligopoly" (1983). Cowles Foundation Discussion Papers. 907.