Interaction between Cooperation and Upgrade Strategies for Complementary Products

Abstract

Consumer electronics firms like Apple and Xiaomi adopt a “main product + complementary product” business operation mode (e.g., Apple Pencil for iPad). Interestingly, upgrades in main products and complementary products often unsynchronized, while cooperating with a specialized third-party firm seems to facilitate complementary product’s upgrade. Generally, the focal firm faces a long-term cooperation decision (i.e., whether to partner with a third-party firm for complementary product), and a relatively short-term upgrade decision (i.e., whether to upgrade complementary product simultaneously with main product). We construct a two-stage theoretical model to investigate the optimal upgrade and cooperation strategies for complementary product and the interaction mechanism, considering the value-added degree and the third-party firm’s cost advantage. Our findings indicate that upgrading complementary products hurts focal firm when the value-added degree of complementary product is high. Due to excessive bargaining power, the partnership prevents the upgrades unless when the value-added degree is high. Additionally, we find that a delicate balance, depending on the value-added degree, between cost-reduction effect and erosion effect in determining optimal cooperation strategy. Moreover, we demonstrate that firm’s profit and environmental sustainability can achieve a win-win outcome. We also find that the ability to determine value-added degree may instead prevent the upgrade and cooperation.

Keywords

Complementary product / cooperation / upgrade / consumer electronics

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