Executive Summary:

Industries are becoming more horizontal. Products that used to be designed and manufactured by a single firm are now produced by different companies that must coordinate activities. Here, the authors detail the relationship between Intel and Microsoft (both integral to PCs) and, using a mixed-duopoly model, analyze the dynamics of cooperation verses competition. They find that costs associated with complementary R&D, conflicts of interest in pricing, and the possibility of competitors all factor in the decision of when to cooperate or compete. Key concepts include:

• Complementary companies tend to compete on issues of price. For example, if one sells high (Intel's microprocessors) then another must sell low (Microsoft's software) in order for a product (a PC) to be able to sell at a profit.
• Complementors should weigh the costs and benefits of encouraging competition in each others' spaces.