Multimarket Oligopoly: Strategic Substitutes and Complements

A firm's actions in one market can change competitors' strategies in a second market by affecting its own marginal costs in that other market. Whether the action provides costs or benefits in the second market depends on (a) whether it increases or decreases marginal costs in the second market and (b) whether competitors' products are strategic substitutes or strategic complements. The latter distinction is determined by whether more "aggressive" play (e.g., lower price or higher quantity) by one firm in a market lowers or raises competing firms' marginal profitabilities in that market. Many recent results in oligopoly theory can be most easily understood in terms of strategic substitutes and complements.

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This research began as an investigation into how a change in one market can have ramifications in a second market, even if the demands in the two markets are unrelated. We found that a critical issue in determining the nature of the interaction was whether competitors regarded products as strategic substitutes or strategic complements. In other words, would a more aggressive strategy by one firm in a market elicit an aggressive response from its competitors, or would an aggressive move be met with accommodation (competitors playing less aggressively than previously)? It has long been suspected that any result in oligopoly theory, or its converse, can be generated by an appropriate choice of assumptions. Strategic substitutes and complements help explain this basic ambiguity and so focus on a critical distinction. When thinking about oligopoly markets the crucial question may not be, Do these markets exhibit price competition or quantity competition or competition using some other strategic variable? but rather, Do competitors think of the products as strategic substitutes or as strategic complements?

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