Component complementarity and transaction costs: the evolution of product design

The issue of whether firms design and develop products with modular product architectures that benefit from the efficiencies of using the market, or integrated product architectures that allow for leveraging firm capabilities is a central question within the product architecture literature. Empirical results show that product modularisation increases over time across a range of industries. However, evidence of increasing (re)integration at the product and industry level has also been hinted at in a limited set of studies. The fact that product architectures potentially oscillate between the modular and integrated designs, as well as often adopting a hybrid form, highlights the need for an integrated explanation concerning how and why this evolution occurs. On this basis we use draw upon the notions of synergistic specificity and product component complementarity. By considering the trade-offs between different types of value capture that are possible in modular and integrated architectures, we are able to build a basic explanation for the evolution of product architectures and their governance choices over the long-run. The proposed typology and discussion helps to synthesise existing evidence and provides the foundation for further empirical research.