Complementarity is an important concept in many business settings. Two products are complementary when consumers draw higher utility from consuming the goods together instead of separately (e.g., razors and blades, chips and salsa). On the supply side, firms make complementary decisions regarding inputs (e.g., Cobb-Douglas function) or outputs (e.g., economies of density). In principal-agent relationships, complementarity may arise from the cost-savings of agents by performing multiple tasks (Holmstrom and Milgrom 1991). Complementarity may also exist across individual agents. For instance, the value of a product with network effects (e.g., phone services) increases with the number of other people using the product. In settings such as marriage, business alliance, merger and acquisition, the formation of a complementary relationship depends on the decisions of the involved parties. Even among competing firms, there may be complementarities (Milgrom and Roberts 1990) when the increase in an activity of one member raises the probability of increase in the same activity of other members (e.g., Bertrand price competition, innovation adoption). From the above listed cases, perhaps the most interesting pertains to when complementarity %interacts with competition. Depending on the context, complementarity may either alleviate, enhance, or even create competition among firms and individuals. For example, firms providing systems of products can reduce price competition by allowing customer to ``mix and match'' (Matutus and Rigabu1988). co-exists with competition. For example, the components of a system become more attractive when different brands allow consumers to ``mix and match'' (Matutes and Regibeau 1988). In shopping malls, rival department stores tend to cluster together, generating additional customer traffic (Vitorino 2008). In B2B markets, firms may collaborate in the upstream of a channel but compete in the downstream (Venkatesh et al 2006). On the other hand, complementarity in relationship between firms from two sides (e.g., business alliance) may also create some rivalry among individuals from the same side, as they all compete for the best partner on the other side (Fox 2010). In this thesis, I explore the coexistence of competition and complementarity among firms and study its impact on firms' strategic decisions using empirical methods. I propose two essays that explore this topic in different settings: Essay 1 looks at the B2B setting and studies the value co-creation between component suppliers and their large industrial manufacturing customers. While suppliers and customers complement each other in value creation, firms from each side maximize the expected value by matching with the most attractive partner from the other side, thus creating rivalry among firms from the same side. I study whether and to what extent firms' characteristics may explain the match between a supplier and its customer. I explore the complementarity/substitutability in firms' attributes and their respective social network structures. Essay 2 focuses on the B2C setting and studies the airline industry in China, which faces increasing competition from high-speed trains. While planes and trains compete for customers in overlapping routes, they can also feed traffic to each other in connected but not overlapping routes, thus creating a source of complementarity. This paper studies the impact of the introduction of high-speed train on the airline industry's route network decisions. I build structural models in both essays for the analysis. A structural model helps to understand the underlying mechanism that drives firms' behavior, and enables the creation of what-if analysis that aids in predicting firms' decisions in alternative scenarios. My work therefore assists decision-makers and policy makers in striking the right balance between complementarity and competition in these contemporary marketplaces.
University of Minnesota Ph.D. dissertation. May 2018. Major: Business Administration. Advisors: George John, Maria Ana Vitorino. 1 computer file (PDF); xi, 132 pages.
Empirical Studies On Complementarity And Competition In Products And Business Relationships.
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