Product Form Choice: Selling Systems Versus Components in Industrial Markets

Mrinal Ghosh (University of Arizona)
Shantanu Dutta (University of Southern California)
Kellilynn M. Frias (University of Arizona)

Abstract: In this paper we investigate a novel twist to the classic “scope of the firm” problem. Research in organizational economics has hitherto primarily focused on how the production of a given output is governed (e.g., the canonical make versus buy issue). In contrast, we ask the related marketing question: What output does a firm sell? Said otherwise, what is the product-form that a firm offers in the marketplace (and derive revenues from it)? Specifically, in the context of engineered industrial products, we ask: Under what conditions would we observe a firm selling systems (i.e. final products) versus components (i.e. intermediate products)? We treat these product-form choices as alternative institutional arrangements and argue that this decision can be looked at as whether the firm (sell systems) or the market (sell components) is more effective in coordinating the design, development, and marketing of the final product. Crucially, this coordination does not necessarily imply that the firm vertically integrates into the production of the constituent components/parts. We develop refutable predictions on how certain technology-side, customer-side, and firm-level resource factors might differentially impact the ability of the firm (vis-à-vis the market) to coordinate these activities. Micro-level data obtained from 259 firms from 4 industry sectors support our arguments and provide the first systematic evidence on why firms choose a particular product-form location to participate in a value chain. We also test the performance implications of this choice. Our core contribution is to show how the efficiency rationale embodied in the Coase Theorem can provide insights at product-line level (instead of transaction level) decisions and provide an explanation on why firms, and the industries they compete in, might be organized the way they are.

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