Customer‐specific synergies and market convergence

We use an analytical model to study the effects of customer‐specific synergies, i.e., synergies that arise when firms sell multiple products to the same customers. At the firm level, we show that the profitability of a customer‐specific synergy depends upon cross‐market correlation of customer preferences, differs when the synergy is cost‐based versus differentiation‐based, and can even be negative when the synergy is kept proprietary to a single firm. We also show that returns to imitating such a synergy may decline as it strengthens. At the industry level, we find that exploiting customer‐specific synergies causes endogenous market convergence at a point that depends upon whether the synergy is cost‐based or differentiation‐based and whether it is imitated.