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Integration, Complementary Products, and Variety

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  • Church, Jeffrey
  • Gandal, Neil

Abstract

This paper examines the incentives for integration when the market for both consumer durables and supporting or complementary services is oligopolistic. We find that the equilibrium industry structure will depend on the value that consumers place on variety. If the value of additional software is relatively small, the equilibrium industry structure is for both hardware firms to remain unintegrated, while if the value of additional software is relatively large, the equilibrium industry structure is for both hardware firms to integrate. Under the integrated industry structure, profits are lower, less varieties are provided, and hardware prices are lower than under the unintegrated industry structure. The game has a prisoners' dilemma structure when consumers place a high value on the variety of software. This is due to a foreclosure effect. Although consumer surplus is higher under an integrated industry structure, the total surplus associated with the unintegrated industry structure exceeds that of the Integrated industry structure.
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(This abstract was borrowed from another version of this item.)
(This abstract was borrowed from another version of this item.)
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Church, Jeffrey & Gandal, Neil, 1992. "Integration, Complementary Products, and Variety," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 1(4), pages 651-675, Winter.
  • Handle: RePEc:bla:jemstr:v:1:y:1992:i:4:p:651-75
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    1. G.F. Mathewson & R.A. Winter, 1984. "An Economic Theory of Vertical Restraints," RAND Journal of Economics, The RAND Corporation, vol. 15(1), pages 27-38, Spring.
    2. Whinston, Michael D, 1990. "Tying, Foreclosure, and Exclusion," American Economic Review, American Economic Association, vol. 80(4), pages 837-859, September.
    3. Martin K. Perry & Robert H. Groff, 1985. "Resale Price Maintenance and Forward Integration into a Monopolistically Competitive Industry," The Quarterly Journal of Economics, Oxford University Press, vol. 100(4), pages 1293-1311.
    4. Lin, Y Joseph, 1988. "Oligopoly and Vertical Integration: Note," American Economic Review, American Economic Association, vol. 78(1), pages 251-254, March.
    5. Chou, Chien-fu & Shy, Oz, 1990. "Partially Compatible Brands and Consumer Welfare," Foerder Institute for Economic Research Working Papers 275497, Tel-Aviv University > Foerder Institute for Economic Research.
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    Cited by:

    1. Klaus Conrad, 2006. "Price Competition and Product Differentiation when Goods have Network Effects," German Economic Review, Verein für Socialpolitik, vol. 7, pages 339-361, August.
    2. Church, Jeffrey & Gandal, Neil, 1996. "Strategic entry deterrence: Complementary products as installed base," European Journal of Political Economy, Elsevier, vol. 12(2), pages 331-354, September.
    3. Knittel Christopher R. & Stango Victor, 2008. "Incompatibility, Product Attributes and Consumer Welfare: Evidence from ATMs," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 8(1), pages 1-42, January.
    4. Church, J. & Gandal, N., 1993. "Equilibrium Foreclosure and Complementary Products," Papers 9303, Calgary - Department of Economics.
    5. Mathias Dewatripont & Patrick Legros, 2000. "Mergers in Emerging Markets with Network Externalities: The Case of Telecoms," CIG Working Papers FS IV 00-23, Wissenschaftszentrum Berlin (WZB), Research Unit: Competition and Innovation (CIG).
    6. Church Jeffrey & Gandal Neil & Krause David, 2008. "Indirect Network Effects and Adoption Externalities," Review of Network Economics, De Gruyter, vol. 7(3), pages 1-22, September.
    7. Nicholas Economides, 1997. "The Economics of Networks," Brazilian Electronic Journal of Economics, Department of Economics, Universidade Federal de Pernambuco, vol. 1(0), December.
    8. Lazzarini, Sergio G., 2002. "The Performance Implications of Membership in Competing Firm Constellations: Evidence from the Global Airline Industry," Insper Working Papers wpe_23, Insper Working Paper, Insper Instituto de Ensino e Pesquisa.
    9. Knittel, Christopher R. & Stango, Victor, 2011. "Strategic incompatibility in ATM markets," Journal of Banking & Finance, Elsevier, vol. 35(10), pages 2627-2636, October.
    10. Conrad, Klaus, 2004. "Network effects, Compatibility and the Environment : The Case of Hydrogen Powered Cars," Discussion Papers 613, Institut fuer Volkswirtschaftslehre und Statistik, Abteilung fuer Volkswirtschaftslehre.
    11. Nicholas S. Economides & Glenn A. Woroch, 1992. "Benefits and Pitfalls of Network Interconnection," Working Papers 92-31, New York University, Leonard N. Stern School of Business, Department of Economics.
    12. Desruelle, Dominique & Gaudet, Gerard & Richelle, Yves, 1996. "Complementarity, coordination and compatibility: The role of fixed costs in the economics of systems," International Journal of Industrial Organization, Elsevier, vol. 14(6), pages 747-768, October.
    13. Klaus CONRAD, 2005. "Price Competition and Product Differentiation when Goods have Network Effects," Industrial Organization 0502002, University Library of Munich, Germany.
    14. Dachrahn Wu & Ming Chang & Mei-Hua Chang, 2008. "Market coverage and “love of software variety” in the supporting services approach," Netnomics, Springer, vol. 9(2), pages 77-86, October.
    15. Luís M. B. Cabral & Miguel Villas-Boas, 2005. "Bertrand Supertraps," Management Science, INFORMS, vol. 51(4), pages 599-613, April.
    16. Conrad, Klaus, 2004. "Price Competition and Product Differentiation when Goods have Network Effects," Discussion Papers 612, Institut fuer Volkswirtschaftslehre und Statistik, Abteilung fuer Volkswirtschaftslehre.

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