Week 3 (2/2): Complements
Two products are complements if product A increases a users’ utility from Product B and vice versa
Two products are complements if the demand for A increases when the price for B drops and vice versa
Strategies for Complements
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Supporting the other Side: It can make sense to support the supplier of the complement. This
leads to:
o Better quality of complement
o Higher sales of complement
Producing Complements: It can make sense to produce a complement yourself
o Pro:
▪ Better tailoring of the complement to the own product
▪ Quality control for the complement
▪ Internalisation of the positive effects of the complement on own product (Cross
Subsidies, Bundling, Increasing Lock-in)
o Contra
▪ Market for complement may be unattractive
▪ Complement may require competencies the firm lacks
▪ Prospective customers might be put off by the firm’s dominant position
Positive Externalities
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Cross Subsidies: Product A is sold at small margins (even loss) to increase sales of Product B (high
margins)
o Advantage: Increased profits through intelligent pricing
o Risks: Consumers do not buy product B at all or buy it from another manufacturer
Bundling: Firm sells product A and complement B combined as a package
o Advantage: Little or no competition in market for A and decreased competition for B
o Risks: Potential buyers of “A only” or “B only” are lost. Bundling becomes standard and
the advantages of unbundling are overlooked
Increasing Lock-In: Users have switching costs when switching from A to a substitute. The more
complements to A they buy, the higher the switching cost
o Advantage: Higher switching costs imply a higher value of the customer to the firm
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Strategic Partnerships
Producers of complementary goods depend on each other. Helping each other and coordinating each
other’s behavior maximizes the positive effects of complementarity. Forming a strategic partnership is a
powerful way of institutionalizing coordination and formalizing interests
Typical Characteristics of Strategic Partnerships
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Shared decision making
Organizational linkages & coordination mechanisms (Organizational Integration)
Joint Equity ownership (Economic Integration)
Organizational Integration
Teams across firms and established reporting decision routines across firms. There is a heave exchange of
information as well
Economic Integration
Direct cross ownership of equity (A owns equity of B and B owns equity of A)
Setting up a new legal entity
Benefits
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Interest alignment
Retention of control and exclusivity
Feasibility of inter-organizational coordination
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