The market for consumption devices : on complementary products and seller-side revenue-extraction

Abstract

Some products and services are perfect complements to technological devices, such as video games to video game consoles. We analyze how competition between two firms selling such devices is affected by the fact that they can retrieve revenue both from end-users and from firms selling complementary products. We show that non-exclusive complementary products weaken competition relative to when the products are exclusive. Furthermore, competition is less keen when the device producers have inefficient means for retrieving revenue from the seller side, compared to when they have efficient means. Finally, we show that from the set of feasible strategies, the firms will always choose the socially optimal one. A novel finding is that at the consumer side there are brand specific adoption externalities also when the complementary products are non-exclusive.