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Profitability under an Open versus a Closed System

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  • Michael Kende
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    Abstract

    This paper explores the conditions under which a monopolist selling a system consisting of a main component and differentiated secondary components can increase profits by allowing competition in the aftermarket for the secondary components. Opening the system in this fashion can increase profits by giving consumers an added incentive to incur the setup cost of purchasing the main component. This paper extends the second-sourcing literature by showing the explicit effects of various parameters of demand on the decision to open the system. The results show that an open system is likely to be more profitable than a closed one when demand for the system is more elastic, when secondary-component variety is more valued, and when the share of the main component in the total system budget of the consumer is high. 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: 307-326

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    Handle: RePEc:bla:jemstr:v:7:y:1998:i:2:p:307-326

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

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    Cited by:
    1. Gauguier, Jean-Jacques, 2009. "L’industrialisation de l’Open Source," Economics Thesis from University Paris Dauphine, Paris Dauphine University, number 123456789/4388 edited by Toledano, Joëlle, November.
    2. Clements, Matthew T., 2004. "Direct and indirect network effects: are they equivalent?," International Journal of Industrial Organization, Elsevier, vol. 22(5), pages 633-645, May.
    3. Becchetti, Leonardo & Paganetto, Luigi, 2001. "The determinants of suboptimal technological development in the system company-component producers relationship," International Journal of Industrial Organization, Elsevier, vol. 19(9), pages 1407-1421, November.

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