Opera CEO Jon Stephenson von Tetzchner was recently asked about competition from Google Chrome and how that effected his company's browser. See NPR aricle. Surprising, he stated that Chrome's entrance into the marketplace actually helped Opera. "The net effect of Google Chrome has been 20 percent more downloads of Opera every day since [the Google browser's release]." How can that be so? Greater competition lead to more sales for one of the competitors.
In the case of the Opera browser, I believe the answer lies in the shared mega enemy known as Microsoft. Anything that prompts longtime Microsoft Internet Explorer users to try another browser helps to break the monopoly and encourage users to experiment with other browsers. The theory goes, after having tried Chrome, the same user is more likely to try yet another established brower in the marketplace. Another way to state the effect would be that two smaller competitors are both delivering the same message to the public that strengthens and reinforces the communication--i.e., MS Internet Explorer is not longer a cutting edge browser, better free software is out there so go try it.
One my stock business models relating to this dynamic is phenomenon of restaurants huddled together in a neighborhood. Two neighborhoods in my hometown of St. Louis exemplify this: the Italian quarter known as The Hill and the cluster of ethnic restaurants located on South Grand. There must be 20 Italian restaurants located on The Hill, a relatively small, working class neighborhood. How do they all survive? Would it make more sense for the restauranteurs to spread out? The cluster of Italian restaurants on The Hill draws patrons from all over the city (including tourists). The cluster of restaurants creates a critical mass focusing on a narrow market segment. The Hill dominates this small segment of the restaurant market and, thus, the competitors help each other. However, this only goes so far. At some point, the market will not bear additional restaurants (however, this weeds out the worst of the bunch making the survivors better).
A five block stretch of South Grand Boulevard near Tower Grove Park is packed with ethnic restaurants: Vietnamese (3), Chinese (2), Thai (2), Sushi (2), Persian (1), Afghani (1), Ethiopian (1), Italian (1) plus three coffee / sandwich shops and an American style dinner. This clustering of affordably priced ethnic restaurants upon one small stretch of road brings in customers from all over the metro area. But too much of a good thing can turn into a bad thing. With the recent economic downturn, two Vietnamese restaurants closed. One was the highest priced Vietnamese restaurant in the neighborhood and, consequently, the weakest competitor.
To sum up, the grouping of small competitors into the same space can, under certain circumstances, actually be mutually beneficial to those in the group; however, this strategy has its limits.