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Integration, Complementary Products and Variety

Author

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  • Church, J.
  • Gandal, N.

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.)
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Church, J. & Gandal, N., 1992. "Integration, Complementary Products and Variety," Papers 3-92, Tel Aviv.
  • Handle: RePEc:fth:teavfo:3-92
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    References listed on IDEAS

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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. 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.
    2. Nicholas Economides, 1997. "The Economics of Networks," Brazilian Electronic Journal of Economics, Department of Economics, Universidade Federal de Pernambuco, vol. 1(0), December.
    3. Knittel, Christopher R. & Stango, Victor, 2011. "Strategic incompatibility in ATM markets," Journal of Banking & Finance, Elsevier, vol. 35(10), pages 2627-2636, October.
    4. Church, J. & Gandal, N., 1993. "Equilibrium Foreclosure and Complementary Products," Papers 3-93, Tel Aviv - the Sackler Institute of Economic Studies.
    5. Conrad, Klaus, 2004. "Price Competition and Product Differentiation when Goods have Network Effects," Discussion Papers 612, Institut fuer Volkswirtschaftslehre und Statistik, Abteilung fuer Volkswirtschaftslehre.
    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. 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.
    8. 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.
    9. 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.
    10. 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).
    11. 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.
    12. 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.
    13. Klaus CONRAD, 2005. "Price Competition and Product Differentiation when Goods have Network Effects," Industrial Organization 0502002, University Library of Munich, Germany.
    14. Luís M. B. Cabral & Miguel Villas-Boas, 2005. "Bertrand Supertraps," Management Science, INFORMS, vol. 51(4), pages 599-613, April.
    15. 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.
    16. Knittel, Christopher R. & Stango, Victor, 2011. "Strategic incompatibility in ATM markets," Journal of Banking & Finance, Elsevier, vol. 35(10), pages 2627-2636, October.
    17. 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.
    18. Christopher Knittel & Victor Stango, 2005. "Incompatibility, Product Attributes and Consumer Welfare: Evidence from ATMs," Working Papers 16, University of California, Davis, Department of Economics.
    19. Christopher Knittel & Victor Stango, 2006. "Strategic Incompatibility in ATM Markets," Working Papers 225, University of California, Davis, Department of Economics.
    20. 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.

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    Keywords

    consumption ; software ; enterprises;

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