Understanding Value-Added Resellers' Assortments of Multi-Component Systems

Inter-connect standards increase choices; e.g., in cardiac pacemakers, the IS-1 standard enables the “pulse generator” from six manufacturers to be combined with the “lead set” from the other five to add up to thirty additional mixed-brand pacemakers. However, observed assortment additions are much smaller, which poses a puzzle since manufacturers in extant models welcome such additions to reduce price competition and increase variety. Instead, conflict with the value-added resellers (VARs) who create, and carry these additions is commonplace. We extend the literature with our analytical model that shows VARs limit the number and composition of additions to gain better upstream terms. This conflict is exacerbated when “keystone” components are relatively more decisive in influencing customer choices, so their exclusion from an addition represents a larger loss. Our empirical study of the multi-billion dollar auto paint refinish market finds assortment additions consistent with our predictions. We conclude with discussing the role of channel support programs to ameliorate these conflicts