The Pricing and Profitability of Modular Clusters

The last twenty years have witnessed the rise of disaggregated “clusters” or “networks” of firms. In these clusters the activities of R&D, product design, production, logistics and selling may be split up among hundreds or even thousands of firms. Different firms will design and produce the different modules of a complex artifact (like the processor, peripherals, and software of a computer system), and different firms will specialize in different stages of a complex production process. This paper considers the pricing behavior and profitabililty of such clusters. In particular, we investigate a possibility hinted at in prior work: that pressures to raise prices across complementary-goods markets can offset pressures to reduce prices within oligopolistic differentiated-goods markets. In this paper, we isolate the offsetting price effects and show how they might operate in large as well as small clusters. We argue that it is theoretically possible for a “modular cluster” of firms to mimic the pricing behavior and profitability of “one big firm.”