How Complementors Benefit from Taking Competition to the System Level

Markus Reisinger, Jens Schmidt, Nils Stieglitz

Research output: Contribution to journalArticleScientificpeer-review

Abstract

In many industries, multiple independent complementors supply the individual com- ponents of a system. In this article, we develop a formal model to examine the tensions and trade-offs that result when a firm—either one of the complementors or a de novo entrant—takes competition to the system level by launching an integrated offering that combines the multiple components. A complementor who takes competition to the sys- tem level becomes a competitor to itself at the system level. As a consequence, the task of maintaining the competitiveness of the multiple-component system rests on the shoulders of the remaining complementor. We show that this allows the integrator to earn additional profits at the expense of the complementor—i.e., it can raise the price of its component and thereby squeeze the margin of its complementor. We find that this squeezing effect can be so strong that offering an integrated system is profitable even if the system itself is unprofitable. Interestingly, when analyzing the possibil- ity of entry by a de novo integrator who does not suffer from self-cannibalization, we show that an incumbent complementor may nevertheless have stronger incentives to launch an integrated offering. This is because the incumbent’s ability to benefit from squeezing its complementor and earn additional profits on cannibalized sales leads to an entrant’s disadvantage when taking competition to the system level. We also discuss defense strategies for complementors to shield themselves against the consequences of integration by their complementor.
Original languageEnglish
JournalManagement Science
Publication statusAccepted/In press - 2020
MoE publication typeA1 Journal article-refereed

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