Exclusionary strategies and the rise of winner-takes-it-all markets on the Internet

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 first-mover 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.