Coordination Costs and the Optimal Partition of a Product Design

RIETI Discussion Paper Series 03-E-014Coordination Costs and the Optimal1Partition of a Product DesignHirokazu TAKIZAWARIETI1-3-1 Kasumigaseki, Chiyoda-ku, Tokyo 100-8901, JapanPhone: +81-3-3501-8275Fax: +81-3-3501-8416June 2003AbstractThe purpose of this paper is to analyze the problem of optimally partitioninga design process of a complex product, and to derive several comparative staticsresults by utilizing the technique developed by Topkis (1998). By partitioning theproduct design and assigning each sub-design to a team, there are the benefit ofhaving many smaller real options on the one hand, and the cost resulting froman increased incidence of across-team coordination on the other. Furthermore, byendogenizing the across-team coordination costs, our analysis shows that lower costof within-team coordination induces coarser partitions and higher costs of across-team coordination, i.e. lower level of information and communication technology(ICT) investment. It is argued that these results may explain the reason for theretarded introduction of the ICT by Japanese firms in the 1970s and 1980s aswell as the difference of performance between Route 128 and Silicon Valley in the1990s. It is also argued that our results are consistent with the empirical finding byBrynjolfsson, Maline, Gurbaxani, and Kambil (1994) that ICT leads to decreases infirm size.JEL Classification: D21;L23;O32Keywords: Coordination; Modular design; Option value;Supermodularity; ...