The Pricing and Profitability of Modular Clusters

64 Pages Posted: 8 Oct 2003

See all articles by Kim B. Clark

Kim B. Clark

Harvard Business School; National Bureau of Economic Research (NBER); Brigham Young University Idaho

C. Jason Woodard

Franklin W. Olin College of Engineering

Carliss Y. Baldwin

Harvard Business School

Date Written: August 1, 2003

Abstract

The last twenty years have witnessed the rise of disaggregated "clusters" or "networks" of firms. In these clusters the activities of R&D, product design, production, logistics and selling may be split up among hundreds or even thousands of firms. Different firms will design and produce the different modules of a complex artifact (like the processor, peripherals, and software of a computer system), and different firms will specialize in different stages of a complex production process. This paper considers the pricing behavior and profitabililty of such clusters. In particular, we investigate a possibility hinted at in prior work: that pressures to raise prices across complementary-goods markets can offset pressures to reduce prices within oligopolistic differentiated-goods markets. In this paper, we isolate the offsetting price effects and show how they might operate in large as well as small clusters. We argue that it is theoretically possible for a "modular cluster" of firms to mimic the pricing behavior and profitability of "one big firm."

Keywords: oligopolistic pricing, vertical integration, modularity, cluster

JEL Classification: D21, D40, L13, L22, L23, M11, O31

Suggested Citation

Clark, Kim and Woodard, Charles Jason and Baldwin, Carliss Y., The Pricing and Profitability of Modular Clusters (August 1, 2003). HBS Working Paper No. 04-006; Harvard NOM Working Paper No. 03-49, Available at SSRN: https://ssrn.com/abstract=441520 or http://dx.doi.org/10.2139/ssrn.441520

Kim Clark

Harvard Business School ( email )

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National Bureau of Economic Research (NBER)

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Brigham Young University Idaho

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Charles Jason Woodard

Franklin W. Olin College of Engineering ( email )

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Needham, MA 02492-1200
United States

HOME PAGE: http://www.olin.edu/faculty/profile/c-jason-woodard/

Carliss Y. Baldwin (Contact Author)

Harvard Business School ( email )

Boston, MA 02163
United States

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