Complements

• User Utility

  • Utility is basically how much you're better off using the particular good
  • Two products A and B
  • There are complements if B increases users' utility from A and vice versa
  • U(A + B) > U(A) + U(B)

• Cross-Price Elasticity

  • Two products A and B
  • These are complements if the demand for B increases when the price of A drops, and vice versa
  • This phenomenon is referred to as negative cross-price elasticity(Meaning that, the price of one product and the demand for the other product go in opposite directions)
  • 被A降價吸引過來的新顧客也許會買B，同時對於本來就要買A的人，他們剩下了更多的預算可以購置B。

• Surperising Complements

  • Substitute goods can also have complementary effects
  • A price cut of the substitute good decreases market share but increases the size of the market, resulting in a positive net effect
  • E.g : Cloth shops in the same mall
  • Shop A's price cut makes the whole mall more attractive
  • Shop B's sales increase due to the additional customers

We wouldn't think of substitute products as complements, but there maybe particular complementary effects.

Strategies for Complements

Generic Strategies

• Supporting the Other Side

  • Better quality of complement
  • Higher sales of complement

• Producing the Complements yourself

  • There are some problems :
  • Market for complement may be unattractive
  • Complement may require competencies the firm lacks (production, R&D, management, ...)
  • Prospective customers might be put off by firm's dominant position
  • Advantage :
  • Better tailoring of complement to own product
  • Quality control for complement
  • Internalisation of the positive effects of the complement on own product : Cross Subsidies, Bundling, Increasing Lock-In(Explained beneath)

Positive Externalities

• Cross Subsidies

  • Idea : Product A is sold at small margins (even loss) to increase sales of product B (high margins)
  • Advantage : Increased profits through intelligent pricing (think the Cross-Price Elasticity)
  • Risks : Consumers do not buy product B at all, or buy B from another manufacturer

• Bundling

  • Idea : Firm sells product A and complement B combined as a package
  • Advantage : Decreased competition in market for both A and B
  • Risk : Potential buyers of "A only" or "B only" are lost
  • Risk : Bundling becomes standard and advantages of unbundling are overlooked

• Increasing Lock-In

  • Idea : Users have switching costs when switching from A to a substitute
  • The more complements(B, C, ...) to A they buy, the higher the switching cost
  • Advantage : Higher switching costs imply a higher value of the customer to the firm
  • Risk : 視訊未提及，不過我覺得因該是上面一節關於有預見性的消費者不願意被套牢那條……

Complements and Cooperation

Competitors as Complementors

• In certain situations, firms may be :

  • Competitors in part of the market
  • Complementors in another part of the market

• In such a constellation, they may not compete that harshly

Strategic Partnerships

• Formalising Interests

  • Producers of complementary goods dependent on each other
  • Helping each other and coordinating each other's behaviour maximizes the positive effects of complementarity
  • In many cases, integration into one single company not feasible or not desired by involved firms
  • Forming a strategic partnership is a powerful way of institutionalizing coordination and formalising interests

• Strategic Partnerships

  • Relationships between firms
  • Typical characteristics :
  • Shared decision making
  • Organisational linkages & coordination mechanisms (organisational integration)
  • Joint equity ownership (economic integration)(To align the interests of firms and make the strategic partnership work effectively)

• Organisational Integration

  • Teams across firms
  • Established reporting and decision routines across firms
  • Heavy exchange of information
  • Does not depend on the fact that I have shared asset ownership

• Economic Integration

  • Direct cross ownership of equity
  • Setting up a new legal entity (joint venture)
  • Benefits :
  • Alignment of interests
  • Retention of control and exclusivity
  • Feasibility of inter-organisational coordination

• Complementary to Coordination

  • If firms produce complementary products , already high incentives to work together cooperatively
  • Less need for economic integration to align interests (They are well aligned already)