Complementary Goods: Creating, Capturing, and Competing for Value

Posted: 13 Nov 2013

See all articles by Taylan Yalcin

Taylan Yalcin

Independent

Elie Ofek

Harvard Business School - Marketing Unit

Oded Koenigsberg

London Business School - Department of Marketing

Eyal Biyalogorsky

Arison School of Business; Independent

Abstract

This paper studies the strategic interaction between firms producing strictly complementary products. With strict complements, a consumer derives positive utility only when both products are used together. We show that value-capture and value-creation problems arise when such products are developed and sold by separate firms ("nonintegrated" producers). Although the firms tend to price higher for given quality levels, their provision of quality is so low that, in equilibrium, prices are set well below what an integrated monopolist would choose. When one firm can mandate a royalty fee from the complementor producer (as often occurs in arrangements between hardware and software makers), we find that the value-capture problem is mitigated to some extent and consumer surplus rises. However, because royalty fees greatly reduce the incentives of the firm paying them to invest in quality, the arrangement exacerbates the value-creation problem and leads to even lower total quality. Surprisingly, this result can reverse with competition. Specifically, when the firm charging the royalty fee faces a vertically differentiated competitor, the value-creation problem is greatly reduced — opening the door for the possibility of a Pareto-improving outcome in which all firms and consumers benefit. It is worth noting that this outcome cannot be achieved by giving firms the option of introducing a line of product variants; competition serves as a necessary "commitment" ingredient.

Keywords: complementary goods, product quality, royalty fees, competition, game theory

Suggested Citation

Yalcin, Taylan and Ofek, Elie and Koenigsberg, Oded and Biyalogorsky, Eyal, Complementary Goods: Creating, Capturing, and Competing for Value. Marketing Science, Vol. 32, No. 4, 2013; pp. 554-569; DOI: 10.1287/mksc.2013.0785. Available at SSRN: https://ssrn.com/abstract=2329511

Taylan Yalcin (Contact Author)

Independent ( email )

No Address Available

Elie Ofek

Harvard Business School - Marketing Unit ( email )

Soldiers Field
Boston, MA 02163
United States
617-495-6301 (Phone)
617-496-5853 (Fax)

Oded Koenigsberg

London Business School - Department of Marketing ( email )

Sussex Place
Regent's Park
London, NW1 4SA
United Kingdom

Eyal Biyalogorsky

Arison School of Business ( email )

P.O. Box 167
Herzliya, 46150
Israel

Independent ( email )

No Address Available

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