Competing complements
By: Ramon Casadesus-Masanell, Barry Nalebuff, David B. Yoffie
Contributors: Yoffie, David B.; Nalebuff, Barry, 1958-; Harvard Business School
Edition: Rev. ed.
Series: Working paper / Harvard Business School -- 09-009; Working paper (Harvard Business School) -- 09-009.
Publisher: Harvard Business School
Published: 2007
Place of publication: [Boston]
Language: eng
Number of pages: 38
Description: 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 equilibrium. With constant marginal costs, there is never a pure-strategy solution where the lower-quality B firm obtains positive market share. We also consider the case where A obtains revenue from follow-on sales, as might arise when A expects to make upgrade sales to an installed base. If profits from the installed base are sufficiently large, a pure-strategy equilibrium exists where both B firms are 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.
Notes: "July 2008, revised March 2010"--Publisher's web site.

Includes bibliographical references.