Product boundary, vertical competition, and the double mark-upproblem

Authors


  • We would like to thank Jaypil Choi, Joseph Farrell, Editor Joseph Harrington, Doh-Shin Jeon, and two anonymous referees for their insightful comments and valuable suggestions. We are grateful to Drew Fudenberg for his helpful comments on an early version of this paper. Also, we thank Zihui Ma for his research assistance. This paper has benefited from many audiences in the Kiel Workshop 2003, the North America Econometric Society Winter Meeting 2005, and seminars at SKKU and KDI school 2005. We are grateful for RGC grant HKUST6209/04H from HKSAR for financial support. Cheng is grateful to the hospitality of the School of Information Management and Systems at UC-Berkeley, where he developed an interest in the computing and telecommunications industries when he was a visiting scholar in 2001. Any errors are our own.

**Sogang University and Hong Kong University of Science and Technology; shnahm@sogang.ac.kr.

Abstract

We develop a model in which a main product (called product A) provides a performance quality z by itself, whereas a complementary product (called product B) is useless by itself but enhances the main product's performance quality to q > z. This asymmetric complementarity gives rise to the following results. First, if z is relatively small, then firms A and B behave as if the products are symmetrically complementary with the usual double marginalization problem. Second, if z is sufficiently large, then firms A and B price their products as if they are independent. Third, over a certain range of intermediate z, no pure-strategy Nash equilibrium exists.

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