Product design partitions with complementary components

This paper combines work on modularity-in-design with results from economics on supermodular functions. I develop a model of product design in which a set of complementary components is partitioned for the purposes of product development. The model focuses on how the extent of the complementarity between components affects the optimal partitioning of components. The primary findings of the analysis are as follows: (1) Reductions in the cost of across-design-group communication make finer product design partitions more attractive, while reductions in the cost of within-group communication favor coarser partitions. (2) Firms should group components for which the next-generation design is relatively more uncertain together. (3) Firms can learn about the extent of the complementarity between components by choosing an arbitrary partition of the components and using the mix-and-match feature of 'modular' design [Baldwin, C.Y., Clark, K.B., 1994. Modularity-in-design: an analysis based on the theory of real options. Working Paper 93-026, Harvard Business School] to infer the interactions between the performance dimensions. (4) The problem of selecting an optimal partition of components is NP-complete.