Competing Complements

49 Pages Posted: 27 Nov 2007

See all articles by Ramon Casadesus-Masanell

Ramon Casadesus-Masanell

Harvard University - Strategy Unit

Barry J. Nalebuff

Yale University - Yale School of Management; Yale University - Cowles Foundation

David Yoffie

Harvard University - Strategy Unit

Date Written: November 2007

Abstract

In Cournot's model of complements, the producers of A and B are both monopolists. This paper extends Cournot's model to allow for competition between complements on one side of the market. Consider two complements, A and B, where the A + B bundle is valuable only when purchased together. Good A is supplied by a monopolist (e.g., Microsoft) and there is competition in the B goods from vertically differentiated suppliers (e.g., Intel and AMD). In this simple game, there may not be a pure-strategy equilibria. In the standard case where marginal costs are weakly positive, there is no pure strategy where the lower quality B firm obtains positive market share. We also consider the case where A has negative marginal costs, as would arise when A can expect to make upgrade sales to an installed base. When profits from the installed base are sufficiently large, a pure strategy equilibrium exists with two B firms active in the market. Although there is competition in the complement market, the monopoly firm A may earn lower profits in this environment. Consequently, A may prefer to accept lower future profits in order to interact with a monopolist complement in B.

Suggested Citation

Casadesus-Masanell, Ramon and Nalebuff, Barry and Yoffie, David, Competing Complements (November 2007). NET Institute Working Paper No. 07-44. Available at SSRN: https://ssrn.com/abstract=1032461 or http://dx.doi.org/10.2139/ssrn.1032461

Ramon Casadesus-Masanell (Contact Author)

Harvard University - Strategy Unit ( email )

Harvard Business School
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HOME PAGE: http://www.people.hbs.edu/rmasanell

Barry Nalebuff

Yale University - Yale School of Management ( email )

135 Prospect Street
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203-432-6974 (Fax)

Yale University - Cowles Foundation ( email )

Box 208281
New Haven, CT 06520-8281
United States
203-432-5968 (Phone)

HOME PAGE: http://barrynalebuff.com

David Yoffie

Harvard University - Strategy Unit ( email )

Harvard Business School
Soldiers Field Road
Boston, MA 02163
United States

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