Competing Complements

Ramon Casadesus-Masanell (), Barry Nalebuff and David B. Yoffie ()
Additional contact information
Ramon Casadesus-Masanell: Harvard Business School, http://drfd.hbs.edu/fit/public/facultyInfo.do?facInfo=ovr&facEmId=rmasanell@hbs.edu
David B. Yoffie: Harvard Business School, http://drfd.hbs.edu/fit/public/facultyInfo.do?facInfo=ovr&facEmId=dyoffie%40hbs.edu

No 07-44, Working Papers from NET Institute

Abstract: In Cournot's model of complements, the producers of A and B are both monopolists. This paper extends Cournot's model to allow for competition between complements on one side of the market. Consider two complements, A and B, where the A+B bundle is valuable only when purchased together. Good A is supplied by a monopolist(e.g., Microsoft) and there is competition in the B goods from vertically differentiated suppliers (e.g., Intel and AMD). In this simple game, there may not be a pure-strategy equilibria. In the standard case where marginal costs are weakly positive, there is no pure strategy where the lower quality B firm obtains positive market share. We also consider the case where A has negative marginal costs, as would arise when A can expect to make upgrade sales to an installed base. When profits from the installed base are sufficiently large, a pure strategy equilibrium exists with two B firms active in the market. Although there is competition in the complement market, the monopoly Firm A may earn lower profits in this environment. Consequently, A may prefer to accept lower future profits in order to interact with a monopolist complement in B.

Keywords: AMD; complementors; complements; co-opetition; equilibrium non-existence; installed base; Intel; Microsoft; pricing. (search for similar items in EconPapers)
JEL-codes: C72 D43 K21 L13 L15 M21 (search for similar items in EconPapers)
Pages: 48 pages
Date: 2007-08, Revised 2007-11
New Economics Papers: this item is included in nep-bec, nep-com, nep-ind, nep-law and nep-mic
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (13)

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