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Competing Complements

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Abstract

In Cournot's model of complements, the producers of A and B are both monopolists. This paper extends Cournot's model to allow for competition between complements on one side of the market. Consider two complements, A and B, where the A+B bundle is valuable only when purchased together. Good A is supplied by a monopolist(e.g., Microsoft) and there is competition in the B goods from vertically differentiated suppliers (e.g., Intel and AMD). In this simple game, there may not be a pure-strategy equilibria. In the standard case where marginal costs are weakly positive, there is no pure strategy where the lower quality B firm obtains positive market share. We also consider the case where A has negative marginal costs, as would arise when A can expect to make upgrade sales to an installed base. When profits from the installed base are sufficiently large, a pure strategy equilibrium exists with two B firms active in the market. Although there is competition in the complement market, the monopoly Firm A may earn lower profits in this environment. Consequently, A may prefer to accept lower future profits in order to interact with a monopolist complement in B.

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Bibliographic Info

Paper provided by NET Institute in its series Working Papers with number 07-44.

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Length: 48 pages
Date of creation: Aug 2007
Date of revision: Nov 2007
Handle: RePEc:net:wpaper:0744

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Related research

Keywords: AMD; complementors; complements; co-opetition; equilibrium non-existence; installed base; Intel; Microsoft; pricing.;

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  1. Dennis W. Carlton & Michael Waldman, 2002. "The Strategic Use of Tying to Preserve and Create Market Power in Evolving Industries," RAND Journal of Economics, The RAND Corporation, vol. 33(2), pages 194-220, Summer.
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Cited by:
  1. Chen, M. Keith & Nalebuff, Barry, 2006. "One-Way Essential Complements," Working Papers 22, Yale University, Department of Economics.
  2. Andrea Mantovani, 2013. "The Strategic Effect of Bundling: A New Perspective," Review of Industrial Organization, Springer, Springer, vol. 42(1), pages 25-43, February.
  3. Vladimir I. Soloviev & Natalia A. Iliina & Marina V. Samoyavcheva, 2009. "Cournot Equilibrium In A Model Of Hardware And Software Manufacturers’ Interaction," Annales Universitatis Apulensis Series Oeconomica, Faculty of Sciences, "1 Decembrie 1918" University, Alba Iulia, Faculty of Sciences, "1 Decembrie 1918" University, Alba Iulia, vol. 1(11), pages 4.
  4. Noriaki Matsushima & Tomomichi Mizuno, 2009. "Vertical Separation as a Defense against Strong Suppliers," ISER Discussion Paper 0755, Institute of Social and Economic Research, Osaka University.
  5. Juan José Ganuza & María Fernanda Viecens, 2010. "Exclusive Content and the Next Generation Networks," Working Papers 2010-21, FEDEA.
  6. Soloviev, Vladimir, 2009. "Экономико-Математическое Моделирование Рынка Программного Обеспечения: Монография. — М.: Вега-Инфо, 2009. — 176 С
    [Economic and mathematical modelling of software market]
    ," MPRA Paper 28974, University Library of Munich, Germany.
  7. Casadesus-Masanell, Ramon & Ricart, Joan E., 2007. "Competing through business models," IESE Research Papers D/713, IESE Business School.
  8. Lleras, Juan S. & Miller, Nathan H., 2011. "The entry incentives of complementary producers: A simple model with implications for antitrust policy," Economics Letters, Elsevier, vol. 110(2), pages 147-150, February.
  9. Matteo Alvisi & Emanuela Carbonara & Francesco Parisi, 2011. "Separating complements: the effects of competition and quality leadership," Journal of Economics, Springer, Springer, vol. 103(2), pages 107-131, June.

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