Free-complemented markets

With respect to free-complemented markets, consider first that individual products or services are components within larger systems. For example, mountain bikes are a product that fits within a system of complements ranging from mountain biking techniques to helmets, tire pumps, navigation devices, and lights. From the perspective of the producer of any product or service within such a system, the other elements of the system are complements that range from useful to essential and that therefore add to the value of that "focal” product or service (the one I am focusing on). Thus, if I buy a specialized mountain bike and want to use it skillfully, I need the essential complement of mountain bike riding techniques. Biking techniques are largely diffused from peer to peer by free innovators rather than being sold. In other words, mountain bike producers are participating in and benefiting from a free-complemented market. The market for specialized mountain bikes would be much smaller without the free complement of mountain biking techniques.

Free-complemented markets can involve products that are separate from but complementary to producer products, as in the case of the mountain bike riding techniques just mentioned. They can also involve modifications or complements built onto or into producers' products or platforms. With respect to the latter, consider software modifications and additions that complement the value of basic commercial software products in fields ranging from music software to computer gaming software (Jeppesen and Frederiksen 2006; Prugl and Schreier 2006; Boudreau and Jeppesen 2015; Harhoff and Mayrhofer 2010). The evidence for the widespread presence of free-complemented markets runs counter to the conventional assumption that only producers provide complements, although customers are able to select and assemble them (Schilling 2000; Jacobides 2005; Adner and Kapoor 2010; Baldwin 2010).

In the case of systems of complements, producers may select the most commercially advantageous elements of a system to produce and sell. They will then prefer that the complements they do not sell will be provided to their customers in the form of free complements rather than as commercial products or services sold by other producers. The reason is that producer complementors seek to profit from the complements they provide, whereas free innovators do not. Free comple- mentors therefore leave more profits available for the producer to extract from the system (Baldwin 2015; Baldwin and Henkel 2015; Henkel, Baldwin, and Shih 2013). For example, if free innovators provide the complement of biking techniques "for free,” the value of the system of mountain bike plus mountain biking techniques to the mountain bike purchaser increases. A producer of mountain bikes that has monopoly power could extract some or all of the increased system value created by the free technique innovations by charging more for bikes.

 
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