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Compatibility Decisions, Endogenous Installed Home Bases and the Third-Market Competition

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  • Walz, Uwe
  • Woeckener, Bernd
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    Abstract

    This Paper analyses the compatibility decisions of two regional monopolistic suppliers of a network-effect good who first build up installed bases in their respective home region and then compete in a third market. We show that with weak network effects, installed home bases always are higher under compatibility and suppliers always opt for compatibility. With strong network effects, home markets are covered, and given a sufficiently high home-market size advantage both the favoured supplier and a regional standardization body maintain incompatibility in order (to enable the supplier) to monopolize the third market via limit pricing. As incompatibility always results in a welfare loss, this is a strong case for a global standardization body.

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    Bibliographic Info

    Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3816.

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    Date of creation: Mar 2003
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    Handle: RePEc:cpr:ceprdp:3816

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    Related research

    Keywords: compatibility decisions; installed home base; international network effects; standardization bodies; third-market competition;

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    1. Matutes, Carmen & Regibeau, Pierre, 1996. "A selective review of the economics of standardization. Entry deterrence, technological progress and international competition," European Journal of Political Economy, Elsevier, vol. 12(2), pages 183-209, September.
    2. Pargal, Sheoli, 1996. "Do incompatible network standards lead to domestic benefits? The case of color television," Information Economics and Policy, Elsevier, vol. 8(3), pages 205-227, September.
    3. Barrett, Christopher B. & Yang, Yi-Nung, 1998. "Rational Incompatibility With International Product Standards," Economics Research Institute, ERI Study Papers 28342, Utah State University, Economics Department.
    4. Gandal, Neil & Shy, Oz, 2001. "Standardization policy and international trade," Journal of International Economics, Elsevier, vol. 53(2), pages 363-383, April.
    5. Farrell, Joseph & Saloner, Garth, 1992. "Converters, Compatibility, and the Control of Interfaces," Journal of Industrial Economics, Wiley Blackwell, vol. 40(1), pages 9-35, March.
    6. Chou, Chien-fu & Shy, Oz, 1990. "Network effects without network externalities," International Journal of Industrial Organization, Elsevier, vol. 8(2), pages 259-270, June.
    7. Funk, Jeffrey L. & Methe, David T., 2001. "Market- and committee-based mechanisms in the creation and diffusion of global industry standards: the case of mobile communication," Research Policy, Elsevier, vol. 30(4), pages 589-610, April.
    8. Church, Jeffrey & Gandal, Neil, 1992. "Network Effects, Software Provision, and Standardization," Journal of Industrial Economics, Wiley Blackwell, vol. 40(1), pages 85-103, March.
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