Design Rules, Volume 2: How Technology Shapes Organizations: Chapter 5 Complementarity

36 Pages Posted: 23 Oct 2018

See all articles by Carliss Y. Baldwin

Carliss Y. Baldwin

Harvard Business School, Finance Unit

Date Written: October 4, 2018

Abstract

The purpose of this chapter is to relate the theory of task networks and technology set forth in previous chapters to theories of firm boundaries from economics and management. Complementary goods have more value when used together than separately. Complementarity may be strong or weak. Strong complements are specific and unique goods that have no value (or greatly diminished value) unless all are present in use. In the task network, dense technical interdependencies create strong complementarity, but it can arise for other reasons as well.

Transaction cost economics and property rights theory advise that strong complements should be placed under unified governance, for example, through common ownership. Agency theory suggests that weak complementarity can be handled via arms-length transactions and contracts. Furthermore, strong or weak complementarity are not innate properties of tasks and assets, but can be the result of choices regarding task networks, incentives and job design.

Supermodular complementarity exists when more of one input makes more of another input more valuable. Distributed supermodular complementarity (DSMC) exists when two or more independent actors can create complementary value by pursuing their own interests, and will not find it advantageous to combine in order to coordinate their actions. I derive formal conditions under which DSMC holds as a consistent pattern in a dynamic equilibrium. Given DSMC, clusters of firms making different complementary goods, including open platforms with surrounding ecosystems, can survive and compete effectively against integrated firms that control all complementary inputs.

Suggested Citation

Baldwin, Carliss Y., Design Rules, Volume 2: How Technology Shapes Organizations: Chapter 5 Complementarity (October 4, 2018). Harvard Business School, Harvard Business School Research Paper Series # 19-036. Available at SSRN: https://ssrn.com/abstract=3270914 or http://dx.doi.org/10.2139/ssrn.3270914

Carliss Y. Baldwin (Contact Author)

Harvard Business School, Finance Unit ( email )

Boston, MA 02163
United States

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