How Complementors Benefit from Taking Competition to the System Level

50 Pages Posted: 19 Sep 2019 Last revised: 18 May 2020

See all articles by Markus Reisinger

Markus Reisinger

Frankfurt School of Finance & Management - Economics Department; CESifo (Center for Economic Studies and Ifo Institute)

Jens Schmidt

Aalto University - Industrial Engineering and Management

Nils Stieglitz

Frankfurt School of Finance & Management; University of Southern Denmark - Strategic Organization Design Unit (SOD) - Department of Marketing & Management

Date Written: September 11, 2019

Abstract

In many industries, multiple independent complementors supply the individual components 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 system 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 possibility 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 earning 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.

Keywords: systems competition, margin squeezing, self-cannibalization,de novo entry, entry-prevention strategy

JEL Classification: L11, L13, O33

Suggested Citation

Reisinger, Markus and Schmidt, Jens and Stieglitz, Nils, How Complementors Benefit from Taking Competition to the System Level (September 11, 2019). Available at SSRN: https://ssrn.com/abstract=3451742 or http://dx.doi.org/10.2139/ssrn.3451742

Markus Reisinger (Contact Author)

Frankfurt School of Finance & Management - Economics Department ( email )

Adickesallee 32-34
Frankfurt am Main, 60322
Germany

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Jens Schmidt

Aalto University - Industrial Engineering and Management ( email )

POB 9500
02015, Aalto 00076
Finland

Nils Stieglitz

Frankfurt School of Finance & Management ( email )

Sonnemannstra├če 9-11
Frankfurt am Main, 60314
Germany

University of Southern Denmark - Strategic Organization Design Unit (SOD) - Department of Marketing & Management ( email )

Campusvej 55
DK-5230 Odense M
Denmark

HOME PAGE: http://www.sdu.dk/sod

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
87
Abstract Views
519
rank
344,635
PlumX Metrics