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The Vertical Organization of Industry: Systems Competition versus Component Competition

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  • Joseph Farrell
  • Hunter K. Monroe
  • Garth Saloner

Abstract

We discuss two contrasting styles of vertical organization of complementary activities or components in an industry: systems competition versus component competition. When firms' competencies differ, systems competition is not a perfect substitute for component competition, even with Bertmnd behavior. Costs, prices, industry profits, and the distribution of those profits among firms all differ between the two styles of organization. Moreover, firms' profit incentives do not generally guide them towards the socially efficient form of vertical organization. In duopoly, there is a bias towards open organization (component competition), but with enough firms (three or more, in an exponential example) this bias is reversed. Copyright (c) 1998 Massachusetts Institute of Technology.

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Bibliographic Info

Article provided by Wiley Blackwell in its journal Journal of Economics & Management Strategy.

Volume (Year): 7 (1998)
Issue (Month): 2 (06)
Pages: 143-182

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Handle: RePEc:bla:jemstr:v:7:y:1998:i:2:p:143-182

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Web page: http://www.kellogg.northwestern.edu/research/journals/JEMS/

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Cited by:
  1. Klimenko, Mikhail M., 2004. "Competition, matching, and geographical clustering at early stages of the industry life cycle," Journal of Economics and Business, Elsevier, Elsevier, vol. 56(3), pages 177-195.
  2. Manfredi M.A. La Manna , 2006. "The Hidden Surplus From Research Joint Ventures: An Application Of Systems Reliability Theory," CRIEFF Discussion Papers 0610, Centre for Research into Industry, Enterprise, Finance and the Firm.
  3. Sieber, Sandra & Valor, Josep, 2002. "Market bundling strategies in the horizontal portal industry," IESE Research Papers D/480, IESE Business School.
  4. Oz Shy, 2011. "A Short Survey of Network Economics," Review of Industrial Organization, Springer, Springer, vol. 38(2), pages 119-149, March.
  5. Ashish Arora & Farasat Bokhari, 1996. "Returns to Specialization, Transaction Costs, and the Dynamics of Industry Evolution," Industrial Organization, EconWPA 9606002, EconWPA, revised 01 Jul 1996.
  6. Sang-Hyun Kim & Jay Pil Choi, 2014. "Optimal Compatibility in Systems Markets," University of East Anglia Applied and Financial Economics Working Paper Series, School of Economics, University of East Anglia, Norwich, UK. 057, School of Economics, University of East Anglia, Norwich, UK..
  7. Acciaro, M. & Haralambides, H., 2008. "Product bundling in global ocean transportation," Econometric Institute Research Papers EI 2008-18, Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute.
  8. Burgelman, Robert A., 2002. "Strategy as Vector and the Inertia of Co-evolutionary Lock-in," Research Papers 1745, Stanford University, Graduate School of Business.
  9. Burgelman, Robert A. & Grove, Andrew S., 2007. "Let Chaos Reign, Then Rein In Chaos--Repeatedly: Managing Strategic Dynamics For Corporate Longevity," Research Papers 1954, Stanford University, Graduate School of Business.
  10. Leiponen, Aija, 2006. "Competing through cooperation: Standard setting in wireless telecommunications," Discussion Papers, The Research Institute of the Finnish Economy 1056, The Research Institute of the Finnish Economy.
  11. Kim, Jeong-Yoo, 2002. "Product compatibility as a signal of quality in a market with network externalities," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 20(7), pages 949-964, September.
  12. Steven Globerman & Aidan Vining, 2004. "The Outsourcing Decision: A Strategic Framework," International Trade, EconWPA 0404007, EconWPA.
  13. Fine, Charles H. & Whitney, Daniel E., 1996. "Is the make-buy decision process a core competence?," Working papers #140-96. Working paper (S, Massachusetts Institute of Technology (MIT), Sloan School of Management.
  14. Bonaccorsi, Andrea & Giuri, Paola, 2001. "The long-term evolution of vertically-related industries," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 19(7), pages 1053-1083, July.
  15. Nicolai J. Foss & Thorbj�rn Knudsen, 2003. "The resource-based tangle: towards a sustainable explanation of competitive advantage," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 24(4), pages 291-307.
  16. Mark Shanley & Margaret Peteraf, 2004. "Vertical group formation: A social process perspective," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 25(6-7), pages 473-488.
  17. Liao, Chun-Hsiung & Tauman, Yair, 2002. "The role of bundling in price competition," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 20(3), pages 365-389, March.
  18. Christoph Schlueter-Langdon, 2000. "Information Technology And The Vertical Organization Of Industry," Computing in Economics and Finance 2000, Society for Computational Economics 174, Society for Computational Economics.

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