Competing Across Boundaries : Technological Scope and Inter-Industry Convergence

Information technology industries are often characterized by fluid boundaries, wherein firms do not compete merely with others within their own industry, but face a competitive threat from companies in other adjacent industries. This is often driven by a change over time in the scope of capabilities associated with an underlying technology, and the move towards infrastructures that are more general purpose and platform-based. Recent examples of boundaries blurring include those between the mobile computing and cellular device industries, and between the cable television and wireline voice telephony industries. As a consequence, IT industries are not described well by standard models of imperfect competition, in which the costs of entry, the scope of a product and the boundaries between industries are immutable.We study this phenomenon by developing a model of competition across IT industries with strategic choices of technological scope by firms in neighboring industries. The choice of scope affects both the extent of product differentiation for incumbent IT firms as well as the fixed costs of entry by new ones. Our analysis establishes unique symmetric equilibrium choices of scope and price, both in the absence and the presence of potential competition caused by convergence from outside one's own industry. We show that the right strategic response to a threat of convergence may be to either deter convergence in their core industry, or accommodate it while entering the neighboring industry, and that technological scope is a central strategic variable in accommodation or deterrence. We establish that the benefits of convergence to consumers can be realized before the convergence across industries actually occurs, due to preemptive responses to the threat of convergence by firms within each industry. We analyze a game of bilateral inter-industry convergence to show how gradual progress in an underlying technology can result in radical switches between isolated industries and convergent industries equilibria, leading to the periodic and sudden shifts in industry concentration and firm profitability even in the absence of technological shocks. Such shifts have been observed during the competitive crash in the computer industry, and are likely to recur in the near future on account of voice and video convergence