Article | Marketing Science | July–August 2013

Complementary Goods: Creating, Capturing, and Competing for Value

by Taylan Yalcin, Elie Ofek, Oded Koenigsberg and Eyal Biyalogorsky

Abstract

This paper studies the strategic interaction between firms producing strictly complementary products. With strict complements, a consumer derives positive utility only when both products are used together. We show that value-capture and value-creation problems arise when such products are developed and sold by separate firms. Although the firms tend to price higher for given quality levels, their provision of quality is so low that, in equilibrium, prices are set well below what an integrated monopolist would choose. When one firm can mandate a royalty fee from the complementor producer, we find that the value-capture problem is mitigated to some extent and consumer surplus rises. However, because royalty fees greatly reduce the incentives of the firm paying them to invest in quality, the arrangement exacerbates the value-creation problem and leads to even lower total quality. Surprisingly, this result can reverse with competition. Notably, introducing a competitor opens the door for the possibility of a Pareto-improving outcome in which all firms and consumers are better off.

Keywords: Complementary Goods; product development; competition; royalty fees; Product Marketing; Competition;

Citation:

Yalcin, Taylan, Elie Ofek, Oded Koenigsberg, and Eyal Biyalogorsky. "Complementary Goods: Creating, Capturing, and Competing for Value." Marketing Science 32, no. 4 (July–August 2013): 554–569.