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One-Way Compatibility, Two-Way Compatibility and Entry in Network Industries

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Author Info
Fabio M. Manenti () (Dipartimento di Scienze Economiche "M. Fanno", Università di Padova, Via del Santo 33, 35123 PADOVA)
Ernesto Somma () (Dipartimento di Scienze Economiche, Università degli Studi di Bari, Via C. Rosalba 53, 70124 BARI)

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Abstract

We study the strategic choice of compatibility between two initially incompatible network goods in a two-stage game played by an incumbent and an entrant firm. Compatibility may be achieved by means of a converter. We derive a number of results under different assumptions about the nature of the converter (one-way vs two-way) and the existence of property rights. In the case of a two-way converter, which can only be supplied by the incumbent, incompatibility will result in equilibrium. When both firms can build a one-way converter and there are no property rights on the necessary technical specifications, the unique equilibrium involves full compatibility. Finally, when each firm has property rights on its technical specifications, full incompatibility and preemption are again observed at the equilibrium. With incompatibility, entry deterrence occurs for sufficiently strong network effects. The welfare analysis shows that the equilibrium compatibility regime is socially inefficient for most levels of the network effects.

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Paper provided by Dipartimento di Scienze Economiche - Università di Bari in its series series with number 0004.

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Note: This paper has been completed while the authors were visiting the Haas Business School and SIMS at the University of California, Berkeley. We would like to thank Hal Varian, Michael Carter, Oz Shy, Luigi Filippini and Gianluca Feminis for useful comments. Comments from seminar audiences at the 2002 conference of the Royal Economic Society, University of Warwick, at the 5th Annual Eunip conference 2001, Vienna, at the 2001 Joint EconomicWorkshop Padua-Freiburg and at the Universities of Milan (Catholic) and Catania are gratefully acknowledged.
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Related research
Keywords: Network externalities; one-way compatibility; two-way compatibility;

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Find related papers by JEL classification:
L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection

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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Pehr-Johan Norbäck & Lars Persson & Joacim Tåg, 2008. "Entrepreneurial Innovations in Network Industries," Working Papers 08-02, NET Institute, revised Sep 2008. [Downloadable!]
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