Path Dependence as a Path to Consumer Surplus and Loyalty

In the technology and design industries, one product builds on another: A smart television enhances a smart phone. However, due to complementary features, the utility that is gained by owning both products from the same firm is greater than the sum of the two products’ utility if purchased from separate firms. Aftermarkets suggest that the margins of the second product would increase. Instead, we show that the firms’ complementary utility offset each other, which results in reduced prices. Further, consumer purchase behavior is a function of the product release order; given a different release schedule, some consumers would purchase from a different company.