Design Rules, Volume 2: Chapter 5—Ecosystems and Complementarities

Baldwin, C. Y. (2020) “Ecosystems and Complementarity” Harvard Business School Working Paper (August 2020).

46 Pages Posted: 16 Sep 2020

Date Written: August 12, 2020

Abstract

The purpose of this chapter is to introduce two new building blocks to the theory of how technology shapes organizations. The first is a new layer of organization structure: a business “ecosystem.” The second is the economic concept of “complementarity.” Ecosystems are groups of autonomous firms and individuals whose actions and investments create joint value. Ecosystems are defined by economic complementarities among their members: the value they create acting together is greater than the value they can create acting separately. The modern theory of complementarity thus helps to explain when and why ecosystems survive in the greater economy.

In the first half of this chapter, I define business ecosystems and show how they are related to task networks, transactions, transaction free zones, and corporations. I then describe the methods by which ecosystems are coordinated. The second half of the chapter investigates how economic complementarities influence ecosystems. Within ecosystems, centripetal forces “pull” firms together giving them incentives to combine. Conversely, centrifugal forces “push” firms apart providing incentives to remain separate. The continued existence of an ecosystem requires a balance of these forces, so that the system neither collapses into several large firms nor dissipates into a group of unrelated firms. In the final sections of the chapter, I identify necessary mathematical conditions for an ecosystem to survive as a dynamic equilibrium in the larger economy.

Keywords: Technology, Organizations, Modularity

JEL Classification: L1, L2, O3

Suggested Citation

Baldwin, Carliss Y., Design Rules, Volume 2: Chapter 5—Ecosystems and Complementarities (August 12, 2020). Baldwin, C. Y. (2020) “Ecosystems and Complementarity” Harvard Business School Working Paper (August 2020)., Available at SSRN: https://ssrn.com/abstract=3690595 or http://dx.doi.org/10.2139/ssrn.3690595

Carliss Y. Baldwin (Contact Author)

Harvard Business School ( email )

Boston, MA 02163
United States

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