designingtherulesofgameswithincompleteinformationplayedbetweencompeting rms.

Acombinationofgamesinextensive-formandgamesofincompleteinformationleadstodynamicgamesofincompleteinformation.Thisclassofgamesalsohasmanyapplicationsinindustrialeconomics.TheperfectBayesianequilibriumandthesequentialequilibriumconceptsareusedtoanalyzeimportantissuessuchasreputationbuilding,sequentialbargainingwithincompleteinformation,andpriceorwarrantyasasignalofquality.

Intherestofthissectionwefurtherdevelopafewexamplestoanalyzestrategicbehaviorandtheexerciseofmarketpower.

plements,SubstitutesandStrategicBehavior.Supposethemar-ketdemandsfortwoproductsareinterdependent.Thetwodemandfunctionsmaynotbesymmetricsincetheconsumersforoneproductmaygenerallydi erfromthoseoftheotherproduct.Forexample,televisionprogrammeviewers(ornewspa-persubscribers)andadvertisersaretwodistinctgroupsofconsumers;theaggregatedemandsforTVprogrammes(ornewspapers)andadvertisementsareinterdependentbutnotnecessarilysymmetric.

Whenthetwoproductsaredemandsubstitutes,thereisapositiveexternalitybetweenthetwopricesinthesensethatanincreaseinthepriceforoneproductin-creasesthedemandfor,aswellastheseller’revenuefrom,theotherproduct(giventheconstantmarginalcost).Whilecompetitioninthemarketfordi erentiatedsub-stitutegoodstendstoreduceprices,amulti-productmonopolistcaninternalizethepositiveexternality,leadingtopro t-maximizingpriceshigherthanthelevelsthattwoindependentdivisionsorcompeting rmswouldchoose.Ontheotherhand,whentheproductsaredemandcomplementary,thereisanegativeexternalitybe-tweenthetwopricevariableswhenevaluatingthepro t.Inthiscase,themonopolistchargeslowerpricesthantwoindependentdivisionsor rmswoulddo.Thisout-comeistraditionallyemphasizedinthecontextofaverticalmanufacturer-retailerrelationshipwheredoublemarginalizationcanbeeliminatedbyverticalintegrationorsomeformsofverticalrestraints.

Thenegativeexternalityarisesalsoinmanyothercontextswhereademandcomplementarityispresent.Inthosesituations,the rmsmaynotcompeteinthetraditionalsense.Cooperationcanactuallyhelpreduceconsumerpricesandincrease rmpro ts.CooperationinsuchacontextisemphasizedinabookentitledCo-opetitionbyBrandenburgerandNalebu (1996).Theyusethewordcomplementortodescribetherelationshipbetween rmsthatprovidecomplementaryproductsandarguethat rmsaregenerallycomplementorsinmakingmarketsandcompetitors