Abstract: This paper examines puzzling behavior in industries in which one firm is able to obtain a price premium and/or a dominant market share for a product which is identical to that of its rivals. It is shown that when there is learning by doing, economies of scale, network externalities, or reputational effects, the dominant firm's position may be enhanced by the presence of many weak competitors rather than a few strong ones. The dominant firm may therefore subsidize entry by giving away technical information, setting low licensing fees, or creating its own in-house competition.
JEL Classification: L22;L12