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We develop a property-rights model of the firm in which production entails a continuum of uniquely sequenced stages. In each stage, a final-good producer contracts with a distinct supplier for the procurement of a customized stage-specific component. Our model yields a sharp characterization for the optimal allocation of ownership rights along the value chain. We show that the incentive to integrate suppliers varies system-atically with the relative position (upstream versus downstream) at which the supplier enters the production line. Furthermore, the nature of the relationship between integration and \"downstreamness\" depends crucially on the elasticity of demand faced by the final-good producer. Our model readily accommodates various sources of asymmetry across final-good producers and across suppliers within a production line, and we show how it can be taken to the data with international trade statistics. Combining data from the U.S. Census Bureau's Related Party Trade database and estimates of U.S. import demand elasticities from Broda and Weinstein (2006), we find empirical evidence broadly supportive of our key predictions. In the the process, we develop two novel measures of the average position of an industry in the value chain, which we construct using U.S. Input—Output Tables.

This paper addresses the case of complementary services with vertical relations, using the example of airport handling activities. Our model investigates the effects on welfare and competitiveness of four handling market situations and confirms Cournot's result on competition in complementary goods, unless there are efficiency gaps. We find that horizontal competition in handling services leads to market foreclosure even if an airline performs self-handling. We add some remarks on regulatory issues, showing that regulation may be pointless or even anticompetitive. We show that Council Directive 96/67/EC, although intending to increase competition, may be anticompetitive and decrease consumer surplus. We develop an empirical study in which some of our theoretical results are confirmed.

Social commerce has taken the e-tailing world by storm. Business-to-consumer sites and, more important, intermediaries that facilitate shopping experience, continue to offer more and more innovative technologies to support social interaction among like-minded community members or friends who share the same shopping interests. Among these technologies, reviews, ratings, and recommendation systems have become some of the most popular social shopping platforms due to their ease of use and simplicity in sharing buying experience and aggregating evaluations. This paper studies the effect of electronic word of mouth (eWOM) communication among a closed community of book readers. We studied the entire market of Amazon Shorts e-books, which are digital microproducts sold at a low and uniform price. With the minimal role of price in the buying decision, social discussion via eWOM becomes a collective signal of reputation, and ultimately a significant demand driver. Our empirical study suggests that eWOM can be used to convey the reputation of the product (e.g., the book), the reputation of the brand (i.e., the author), and the reputation of complementary goods (e.g., books in the same category). Until newer social shopping technologies gain acceptance, eWOM technologies should be considered by both e-tailers and shoppers as the first and perhaps primary source of social buying experience.

We consider the invertibility (injectivity) of a nonparametric nonseparable demand system. Invertibility of demand is important in several contexts, including identification of demand, estimation of demand, testing of revealed preference, and economic theory exploiting existence of an inverse demand function or (in an exchange economy) uniqueness of Walrasian equilibrium prices. We introduce the notion of \"connected substitutes\" and show that this structure is sufficient for invertibility. The connected substitutes conditions require weak substitution between all goods and sufficient strict substitution to necessitate treating them in a single demand system. The connected substitutes conditions have transparent economic interpretation, are easily checked, and are satisfied in many standard models. They need only hold under some transformation of demand and can accommodate many models in which goods are complements. They allow one to show invertibility without strict gross substitutes, functional form restrictions, smoothness assumptions, or strong domain restrictions. When the restriction to weak substitutes is maintained, our sufficient conditions are also \"nearly necessary\" for even local invertibility.

This paper evaluates the joint impact of exclusive channels and revenue sharing on suppliers and retailers in a hybrid duopoly common retailer and exclusive channel model. The model bridges the gap in the literature on hybrid multichannel supply chains with bilateral complementary products and services with or without revenue sharing. The analysis indicates that, without revenue sharing, the suppliers are reluctant to form exclusive deals with the retailers; thus, no equilibrium results. With revenue sharing from the retailers to the suppliers, it can be an equilibrium strategy for the suppliers and retailers to form exclusive deals. Bargaining solutions are provided to determine the revenue sharing rates. Our additional results suggest forming exclusive deals becomes less desirable for the suppliers if revenue sharing is also in place under nonexclusivity. In our extended discussion, we also study the impact of channel asymmetry, an alternative model with fencing, composite package competition, and enhanced price-dependent revenue sharing.

Eating a food reduces the desire to eat more of that food. Generalprocess theories of motivation posit that eating a food also increases the motivation to eat other foods—an effect known as cross-stimulus sensitization. The authors propose that eating a food selectively sensitizes consumers to its complements rather than to all foods. Eating a food activates a goal to consume foods that consumers perceive to be well paired with the consumed food. In five experiments, imagined and actual consumption of a food sensitized participants to complementary foods but not to unrelated or semantically associated foods. These findings suggest that cross-stimulus sensitization is more specific and predictable than previously assumed. The authors identify goal activation as the process through which cross-stimulus sensitization occurs and can be instilled.

Financial distress can disrupt a durable goods producer's provision of complementary goods and services such as warranties, spare parts and maintenance. This reduces consumers' demand for the core product, causing indirect costs of financial distress. We test this hypothesis in the market for used cars sold at wholesale auctions. An increase in a manufacturer's credit default swaps significantly decreases the prices of its cars at auction, especially cars with longer expected service lives. Our estimates imply substantial indirect costs of financial distress for car manufacturers. These costs have occasionally even exceeded the tax savings benefits for General Motors and Ford.

Several key questions in bundling have not been empirically examined in marketing: Is mixed bundling more effective than pure bundling or pure components? Does correlation in consumer valuations make bundling more or less effective? Does bundling serve as a complement or substitute to network effects? To address these questions, we develop a consumer-choice model from microfoundations to capture the essentials of our setting, the handheld video game market. We provide a framework to understand the dynamic, long-term effects of bundling on demand. The primary explanation for the profitability of bundling relies on homogenization of consumer valuations for the bundle, allowing the firm to extract more surplus. We find that bundling can be effective through a novel and previously unexamined mechanism of dynamic consumer segmentation , which operates independent of the homogenization effect, and can in fact be stronger when the homogenization effect is weaker. We also find that bundles are treated as separate products (distinct from component products) by consumers. Sales of both hardware and software components decrease in the absence of bundling, and consumers who had previously purchased bundles might delay purchases, resulting in lower revenues. We also find that mixed bundling dominates pure bundling and pure components in terms of both hardware and software revenues. Investigating the link between bundling and indirect network effects, we find that they act as substitute strategies, with a lower relative effectiveness for bundling when network effects are stronger.

We analyze firms that compete by means of exclusive contracts and market-share discounts (conditional on the seller's share of customers' total purchases). With incomplete information about demand, firms have a unilateral incentive to use these contractual arrangements to better extract buyers' informational rents. However, exclusive contracts intensify competition, thus reducing prices and profits and (in all Pareto undominated equilibria) increasing welfare. Market-share discounts, by contrast, produce a double marginalization effect that leads to higher prices and harms buyers. We discuss the implications of these results for competition policy.

Issue Title: Papers from the 9th Triennial Invitational Choice Symposium This article reviews the rapidly growing literature on Structural models of complementary choices. It discusses recent modeling developments and identifies promising areas for future research.[PUBLICATION ABSTRACT]