A Path To Consumer Surplus & Loyalty: How Path Dependent Products Result in Lower Prices and Order-Dependent Consumer Loyalty

Abstract

In the technology and design industries, one product builds on another: a smart television enhances a smart phone. However, due to complimentary features, the utility gained by owning both products from the same firm is greater than the sum of the two products' utility if purchased from separate firms. Aftermarkets suggest the margins of the second product would increase. Instead, we show that the firms' complementary utility offset each other resulting in reduced prices. Further, consumer loyalty is a function of the product release order; given a different release schedule some consumers would be loyal to a different company.

Keywords: Hotelling, Aftermarkets, Bounded Rationality, Complementary Goods, Path Dependance

JEL Classification: L11, L13, D82, D43