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Avoiding market dominance: product compatibility in markets with network effects

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  • Jiawei Chen
  • Ulrich Doraszelski
  • Joseph E. Harrington, Jr.

Abstract

As is well recognized, market dominance is a typical outcome in markets with network effects. A firm with a larger installed base offers a more attractive product which induces more consumers to buy its product which produces a yet bigger installed base advantage. Such a setting is investigated here but with the main difference that firms have the option of making their products compatible. When firms have similar installed bases, they make their products compatible in order to expand the market. Nevertheless, random forces could result in one firm having a bigger installed base, in which case the larger firm may make its product incompatible. We find that strategic pricing tends to prevent the installed base differential from expanding to the point that incompatibility occurs. This pricing dynamic is able to neutralize increasing returns and avoid the emergence of market dominance. Copyright (c) 2009, RAND..

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Bibliographic Info

Article provided by RAND Corporation in its journal The RAND Journal of Economics.

Volume (Year): 40 (2009)
Issue (Month): 3 ()
Pages: 455-485

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Handle: RePEc:bla:randje:v:40:y:2009:i:3:p:455-485

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References

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Citations

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Cited by:
  1. Luís Cabral, 2007. "Dynamic Price Competition with Network Effects," Working Papers, Portuguese Competition Authority 22, Portuguese Competition Authority.
  2. Amir, Rabah & Lazzati, Natalia, 2010. "Network effects, market structure and industry performance," Discussion Papers, Research Unit: Market Behavior SP II 2010-12, Social Science Research Center Berlin (WZB).
  3. Oz Shy, 2011. "A Short Survey of Network Economics," Review of Industrial Organization, Springer, Springer, vol. 38(2), pages 119-149, March.
  4. María Fernanda Viecens, 2009. "Compatibility with Firm Dominance," Working Papers 2009-12, FEDEA.
  5. Miller, Amalia R. & Tucker, Catherine, 2014. "Health information exchange, system size and information silos," Journal of Health Economics, Elsevier, Elsevier, vol. 33(C), pages 28-42.
  6. Laussel, Didier & Resende, Joana, 2014. "Dynamic price competition in aftermarkets with network effects," Journal of Mathematical Economics, Elsevier, vol. 50(C), pages 106-118.
  7. Griva, Krina & Vettas, Nikolaos, 2011. "Price competition in a differentiated products duopoly under network effects," Information Economics and Policy, Elsevier, Elsevier, vol. 23(1), pages 85-97, March.
  8. Ron Borkovsky & Ulrich Doraszelski & Yaroslav Kryukov, 2012. "A dynamic quality ladder model with entry and exit: Exploring the equilibrium correspondence using the homotopy method," Quantitative Marketing and Economics, Springer, Springer, vol. 10(2), pages 197-229, June.
  9. Ulrich Doraszelski & Mark Satterthwaite, 2007. "Computable Markov-Perfect Industry Dynamics: Existence, Purification, and Multiplicity," Levine's Bibliography 321307000000000912, UCLA Department of Economics.
  10. Borkovsky, Ron N. & Doraszelski, Ulrich & Kryukov, Yaroslav, 2009. "A Dynamic Quality Ladder Model with Entry and Exit: Exploring the Equilibrium Correspondence Using the Homotopy Method," CEPR Discussion Papers, C.E.P.R. Discussion Papers 7560, C.E.P.R. Discussion Papers.
  11. Alexander White & E. Glen Weyl, 2010. "Imperfect Platform Competition: A General Framework," Working Papers, NET Institute 10-17, NET Institute, revised Nov 2010.
  12. Doraszelski, Ulrich & Satterthwaite, Mark, 2007. "Computable Markov-Perfect Industry Dynamics: Existence, Purification, and Multiplicity," CEPR Discussion Papers, C.E.P.R. Discussion Papers 6212, C.E.P.R. Discussion Papers.

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