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

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  • Manenti, Fabio M.

    (Universitý di Padova)

  • Ernesto Somma

    (Universitý degli Studi di Bari)

Abstract

We study the strategic choice of compatibility between two initially incompatible software packages in a two-stage game by an incumbent and an entrant firm. Consumers enjoy network externality in consumption and maximise expected surplus over the two periods. Compatibility may be achieved by means of a converter. We derive a number of results under diÆerent 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 and depending on the strength of network externalities the incumbent may deter entry. When both firms can build a one-way converter and there are no property rights on the necessary technical specifications, the only fulfilled expectations subgame perfect 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. Entry deterrence will then occur for su±ciently strong network eÆects. The analysis generalises to any market where network externalities are present.

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Bibliographic Info

Paper provided by Royal Economic Society in its series Royal Economic Society Annual Conference 2002 with number 136.

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Date of creation: 29 Aug 2002
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Handle: RePEc:ecj:ac2002:136

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Cited by:
  1. Pehr-Johan Norbäck & Lars Persson & Joacim Tag, 2008. "Entrepreneurial Innovations in Network Industries," Working Papers 08-02, NET Institute.

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