A Path To Consumer Surplus & Loyalty: How Path Dependent Products Result in Lower Prices and Order-Dependent Consumer Loyalty

Abstract

In the technology industry one product category commonly builds on another. For instance, a smart television product enhances a smart phone. However, because firms can enhance the experience if they produce both products, the utility gained by owning both products from the same firm is greater than the sum of the two products’ utility if purchased from two separate firms. One would think this would increase the margins of the second product, as it does in aftermarkets. However, we show that in a duopoly environment the additional utility produced by the firms offset each other. This explains why we have not seen a dramatic increase in profit margins from hardware producers such as Apple, Google and Samsung.