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Joint selling of complementary components under brand and retail competition

Abstract

Suppliers of complementary goods often package their items together when selling to downstream retailers. One motivation behind this behavior is to reduce double marginalization through coordinated pricing so that system efficiency is improved and individual members can also benefit. The objective of this paper is to understand how competition in supply chains would impact such joint selling partnerships among complementary suppliers. We first model competition at the supply level, which is generated from the existence of multiple partially substitutable brands (or suppliers) for a particular component. We then extend the analysis to a model that also involves retail competition caused by decentralization among retailers who assemble suppliers’ components into final products and sell to customers. The analysis of a model with two complementary components, one of which has multiple brands, indicates that the supply-level competition discourages joint selling of complementary goods. That is, when competing brands become more alike (or substitutable), complementary suppliers act more independently in pricing and selling their items. However, retail competition leads to an opposite effect: Competition among retailers would actually encourage complementary suppliers to package their goods together and act jointly.

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