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Compatibility Incentives Of A Large Network Facing Multiple Rivals

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  • DAVID A. MALUEG
  • MARIUS SCHWARTZ

Abstract

Under network effects, we analyze when a firm with the largest market share of installed‐base customers prefers incompatibility with smaller rivals that are themselves compatible. With incompatibility, consumers realize that intra‐network competition makes the rivals' network more aggressive than a single‐firm network in adding customers. Consequently, under incompatibility the unique equilibrium can entail tipping away from the largest firm whatever its market share. The largest firm is more likely to prefer incompatibility as its share rises (above fifty per cent is necessary) or the potential to add consumers falls; the number of rivals and strength of network effects have ambiguous implications.

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  • David A. Malueg & Marius Schwartz, 2006. "Compatibility Incentives Of A Large Network Facing Multiple Rivals," Journal of Industrial Economics, Wiley Blackwell, vol. 54(4), pages 527-567, December.
    • Handle: RePEc:bla:jindec:v:54:y:2006:i:4:p:527-567
    DOI: 10.1111/j.1467-6451.2006.00299.x
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    References listed on IDEAS

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    1. Nicholas Economides & Fredrick Flyer, 1997. "Compatibility and Market Structure for Network Goods," Working Papers 98-02, New York University, Leonard N. Stern School of Business, Department of Economics.
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