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This paper presents a simple model of compatibility and bundling in industries where consumers assemble several necessary components into a system that is close to their ideal. We show that, for a wide range of parameters, firms will choose to produce compatible components but will offer discounts to consumers who purchase all components from the same firm. However, firms would be better off if they could commit not to provide such discounts. Furthermore, the equilibrium tends to involve socially excessive bundling. Finally, mixed bundling strategies tend to increase the range of parameters over which socially excessive standardization occurs.

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This paper studies the choice of organizational forms in a multi-task principal-agent model. We compare a functional organization in which the firm is organized into functional departments such as marketing and R&D to a product-based organization in which the firm is organized into product lines. Managers' compensation can be based on noisy measures of product-line profits. Measures of a functional area's contribution to total profits are not available, however. This effect favors the product organization. However, if there are significant asymmetries between functional area contributions to organizational success and cross-product externalities within functions, organizing along functional lines may dominate the product organization. The functional organization can also dominate when a function is characterized by strong externalities while the other is not.

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