One-Way Essential Complements
Keith Chen and
Barry Nalebuff
Working Papers from Yale University, Department of Economics
Abstract:
While competition between firms producing substitutes is well understood, less is known about rivalry between complementors. We study the interaction between firms in markets with one-way essential complements. One good is essential to the use of the other but not vice versa, as arises with an operating system and applications. Our interest is in the division of surplus between the two goods and the related incentive for firms to create complements to an essential good. Formally, we study a two-good model where consumers value A alone, but can only enjoy B if they also purchase A. When one firm sells A and another sells B, the firm that sells B earns a majority of the value it creates. However, if the A firm were to buy the B firm, it would optimaly charge zero for B, provided marginal costs are zero and the average value of B is small relative to A. Hence, absent strong antitrust or intellectual property protections, the A firm can leverage its monopoly into B costlessly by producing a competing version of B and giving it away. For example, Microsoft provided Internet Explorer as a free substitute for Netscape; in our model, this maximizes Microsoft's joint monopoly profits. Furthermore, Microsoft has no incentive to raise prices, even if al browser competition exits. This may seem surprising since it runs counter to the traditional gains from price discrimination and versioning. We also show that an essential monopolist has no incentive to degrade rival complementary products, which suggests that a monopoly internet service provider will offer net neutrality. There are other means for the essential A monopolist to capture surplus from B. We consider the incentive to add a surcharge (or subsidy) to the price of B, or to act as a Stackelberg leader. We find a small gain from pricing first, but much greater profits from adding a surcharge to the price of B. The potential for A to capture B's surplus highlights the challenges facing a firm whose product depends on an essential good.
JEL-codes: C7 (search for similar items in EconPapers)
Date: 2006-11
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (19)
Downloads: (external link)
http://economics.yale.edu/sites/default/files/file ... rs/wp000/ddp0022.pdf
Our link check indicates that this URL is bad, the error code is: 404 Not Found (http://economics.yale.edu/sites/default/files/files/Working-Papers/wp000/ddp0022.pdf [301 Moved Permanently]--> https://economics.yale.edu/sites/default/files/files/Working-Papers/wp000/ddp0022.pdf)
Related works:
Working Paper: One-Way Essential Complements (2006) 
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
HTML/Text
Persistent link: https://EconPapers.repec.org/RePEc:ecl:yaleco:22
Access Statistics for this paper
More papers in Working Papers from Yale University, Department of Economics Contact information at EDIRC.
Bibliographic data for series maintained by ().