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Randal Heeb Innovation and Vertical Integration in Complementary Markets

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  • Randal Heeb

Abstract

This paper studies vertical integration by an essential‐good monopolist into complementary markets. Unlike previous studies of complementary products, consumers are allowed to purchase some components of a complementary basket, but not others. Two different pricing strategies by the integrated firm may emerge. In mass‐market equilibria, the price of the complement under integration is zero and it is given away with the essential good. Niche‐market equilibria have more conventional pricing. This dichotomy is consistent with consumer software pricing. Integration enhances consumer and total surplus, unless it leads to exit by the higher‐quality rival, in which case welfare is reduced. Exit is most likely when it is least damaging to consumer welfare. Integration reduces innovation by the rival firm. The effect on innovation by the integrated firm is ambiguous, but numerical computation of an extended model indicates that integration increases the innovation of the integrated firm and enhances welfare.

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  • Randal Heeb, 2003. "Randal Heeb Innovation and Vertical Integration in Complementary Markets," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 12(3), pages 387-417, September.
    • Handle: RePEc:bla:jemstr:v:12:y:2003:i:3:p:387-417
    DOI: 10.1111/j.1430-9134.2003.00387.x
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    Cited by:

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    3. Akifumi Ishihara & Noriyuki Yanagawa, 2013. "Dark Sides of Patent Pools with Compulsory Independent Licensing," CARF F-Series CARF-F-318, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
    4. Peng Huang & Marco Ceccagnoli & Chris Forman & D.J. Wu, 2009. "Participation in a Platform Ecosystem: Appropriability, Competition, and Access to the Installed Base," Working Papers 09-14, NET Institute, revised Sep 2009.
    5. Packalen, Mikko, 2010. "Complements and potential competition," International Journal of Industrial Organization, Elsevier, vol. 28(3), pages 244-253, May.
    6. Correa, Alexander, 2020. "Empaquetamiento e incentivos para mejoras en calidad || Packaging and quality improvements," Revista de Métodos Cuantitativos para la Economía y la Empresa = Journal of Quantitative Methods for Economics and Business Administration, Universidad Pablo de Olavide, Department of Quantitative Methods for Economics and Business Administration, vol. 30(1), pages 163-195, December.
    7. Niedermayer, Andras, 2013. "On platforms, incomplete contracts, and open source software," International Journal of Industrial Organization, Elsevier, vol. 31(6), pages 714-722.
    8. Annabelle Gawer & Rebecca Henderson, 2007. "Platform Owner Entry and Innovation in Complementary Markets: Evidence from Intel," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 16(1), pages 1-34, March.
    9. Miller, David A., 2008. "Invention under uncertainty and the threat of ex post entry," European Economic Review, Elsevier, vol. 52(3), pages 387-412, April.
    10. Yang, Yu & Song, Luona & Lv, Tingjie & Chen, Xia, 2017. "Analysis on the Key Factors of the Network Separation in China in the Era of Telecommunications 4.0," 14th ITS Asia-Pacific Regional Conference, Kyoto 2017: Mapping ICT into Transformation for the Next Information Society 168550, International Telecommunications Society (ITS).
    11. Wen Wen & Feng Zhu, 2016. "How Do Complementors Respond to the Threat of Platform Owner Entry? Evidence from the Mobile App Market," Working Papers 16-10, NET Institute.
    12. Chi, Yunjia & Qing, Ping & Jin, Yong Jimmy & Yu, Jinjun & Dong, Maggie Chuoyan & Huang, Li, 2022. "Competition or spillover? Effects of platform-owner entry on provider commitment," Journal of Business Research, Elsevier, vol. 144(C), pages 627-636.
    13. Ricardo Flores-Fillol & Rafael Moner-Colonques, 2006. "Endogenous Integration and Welfare in Complementary Goods Markets," UFAE and IAE Working Papers 658.06, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
    14. Peng Huang & Marco Ceccagnoli & Chris Forman & D. J. Wu, 2013. "Appropriability Mechanisms and the Platform Partnership Decision: Evidence from Enterprise Software," Management Science, INFORMS, vol. 59(1), pages 102-121, July.

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