Quality coordination and complementary products

This article models the choice of price and quality, where products are complementary; and components can be provided by either one or two monopolists. The firms have to choose price and quality simultaneously, but can coordinate in the latter dimension. We consider two specifications for the quality of the composite good: ‘bottleneck’ and additive set-ups. In both cases, a single monopolist may produce lower quality as compared to dual ownership, if the latter is modelled as a single-stage quality-and-price setting game. When separate markets for components of the composite good are added to the model, we provide an example where dual ownership leading to higher quality also yields higher consumer surplus (but not total welfare) than a single monopolist.