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Publications
  • 2007
  • Working Paper
  • HBS Working Paper Series

Competition in Modular Clusters

By: Carliss Y. Baldwin and C. Jason Woodard
  • Format:Print
  • | Language:English
  • | Pages:49
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Abstract

The last twenty years have witnessed the rise of disaggregated "clusters," "networks," or "ecosystems" of firms. In these clusters the activities of R&D, product design, production, distribution, and system integration may be split up among hundreds or even thousands of firms. Different firms will design and produce the different components 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 profitability of these so-called modular clusters. In particular, we investigate a possibility hinted at in prior work: that for composite goods, a vertical pricing externality operating across complements can offset horizontal competition between substitutes. In this paper, we isolate the offsetting price effects and show how they operate in large (as well as small) clusters. We argue that it is possible in principle for a modular cluster of firms to mimic the pricing behavior and profitability of a vertically integrated monopoly. We then use our model to compare open and closed standards regimes, to understand how commoditization affects a cluster, to determine the relative profits of platform firms and firms that depend on the platform, and to assess the impact of horizontal and vertical mergers. Our model highlights a collective action problem: what is good for an individual firm is often not good for the cluster. We speculate that this conflict may be a source of strategic tension in platform firms.

Keywords

Price; Profit; Digital Platforms; Industry Clusters; Competition; Horizontal Integration; Vertical Integration

Citation

Baldwin, Carliss Y., and C. Jason Woodard. "Competition in Modular Clusters." Harvard Business School Working Paper, No. 08-042, December 2007.
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About The Author

Carliss Y. Baldwin

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More from the Authors
  • Computer-Implemented Methods and Systems for Measuring, Estimating, and Managing Economic Outcomes and Technical Debt in Software Systems and Projects: US Patent 11,126,427 B2 By: Daniel J. Sturtevant, Carliss Baldwin, Alan MacCormack, Sunny Ahn and Sean Gilliland
  • Design Rules, Volume 2: How Technology Shapes Organizations: Chapter 7 The Value Structure of Technologies, Part 2: Strategy without Numbers By: Carliss Y. Baldwin
  • Design Rules, Volume 2: How Technology Shapes Organizations: Chapter 6 The Value Structure of Technologies, Part 1: Mapping Functional Relationships By: Carliss Y. Baldwin
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