Design Rules, Volume 2: How Technology Shapes Organizations: Chapter 5 Complementarity

by Carliss Y. Baldwin

Overview — Even as economics has theories about what assets and activities should be grouped together under common ownership and unified governance, in practice it sometimes makes sense to distribute complementary assets, skills, and activities across separate organizations. This paper investigates when and how this happens.

Author Abstract

The purpose of this chapter is to relate the theory of task networks and technology set forth in previous chapters to theories of firm boundaries from economics and management. Complementary goods have more value when used together than separately. Complementarity may be strong or weak. Strong complements are specific and unique goods that have no value (or greatly diminished value) unless all are present in use. In the task network, dense technical interdependencies create strong complementarity, but it can arise for other reasons as well. Transaction cost economics and property rights theory advise that strong complements should be placed under unified governance, for example, through common ownership. Agency theory suggests that weak complementarity can be handled via arms-length transactions and contracts. Furthermore, strong or weak complementarity are not innate properties of tasks and assets but can be the result of choices regarding task networks, incentives, and job design. Supermodular complementarity exists when more of one input makes more of another input more valuable. Distributed supermodular complementarity (DSMC) exists when two or more independent actors can create complementary value by pursuing their own interests and will not find it advantageous to combine in order to coordinate their actions. I derive formal conditions under which DSMC holds as a consistent pattern in a dynamic equilibrium. Given DSMC, clusters of firms making different complementary goods, including open platforms with surrounding ecosystems, can survive and compete effectively against integrated firms that control all complementary inputs.

Paper Information

  • Full Working Paper Text
  • Working Paper Publication Date: October 2018
  • HBS Working Paper Number: HBS Working Paper #19-036
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