Product Boundary, Vertical Competition, and the Double Mark-Up Problem

In the computing industry, computing systems typically consist of multiple components supplied by independent firms. An important feature of this industry is coopetition. In other words, firms must cooperate with each other in making a system work, but at the same time compete for dividing the industry profits. A firm may, by incorporating the functions of other firms' components into its own product, make its product less dependent on other firms providing complementary components. When one of two firms expands its product boundary by incorporating the other firm's function into its own product, we find that the firm's expansion of the product boundary may increase not only its own profits, but also the other firm's profits and social welfare