I recently read an "advance article" in Marketing Science called “Complementary Goods: Creating, Capturing, and Competing for Value” authored by Taylan Yalcin, Elie Ofek, Oded Koenigsberg, and Eyal Biyalogorsky. When I saw the article, I wanted to read it because many companies today are participating in a complementary goods market. For example, game consoles are nice . . . but only . . . if you have games to play. (I learned this first hand last Christmas when we gave our son a Wii-U and only ONE game.) In the unique situation of producing a product that only has utility if coupled with its partner, companies are challenged with regard to quality and value.
The authors’ primary findings included (1) an integrated firm (producing both complementary products) will do ‘better’ than nonintegrated firms (producing only one of the complementary products) because the integrated firm will be able to internalize all of the gains (2) nonintegrated firms price selfishly and have the incentive to “free ride” on each other’s quality investment.
These findings were kind of depressing if you are participating in the market as a nonintegrated firm. The authors continue with pessimism by sharing that royalties often lead to lower quality on the second product’s side due to the attempt to offset the cost.
Finally, a ray of hope is shared in what the authors call a “win-win-win-win.” The idea is that if a vertically differentiated lower quality competitor enters the market, all 3 firms can benefit (even with royalties). The article states, “Thus, whereas common wisdom might have suggested that a direct rival should make a firm worse off, our findings suggest that managers of complementary goods firms might gain from inviting competition.” I’m not sure I exactly follow the authors’ logic within the paper, but it does make sense to me that within a complementary goods market, it would be “better” to have competition on the “outside” rather than between the two firms producing the complementary goods.
This article reminded me that those involved with complementary goods have unique challenges and it might be important to assess consumer perceptions regarding value and quality for not only their product/service, but also the value and quality of the complementary product /service as well.