Friday, December 19, 2008
Posted by D. Daniel Sokol
ABSTRACT: We study competitive interactions between Intel and Microsoft, two producers of complementary products. In a system of complements, like the PC, the value of the final product depends on how the different components work together. This, in turn, depends on the firms' investments in complementary R&D. We ask whether Intel and Microsoft will want to cooperate and make the final product as valuable as possible. Contrary to the popular view that two tight complements will generally have well aligned incentives, we demonstrate that natural conflicts emerge over pricing, the timing of new product releases, and who captures the greatest value at different phases of product generations.