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Compatibility with Firm Dominance

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  • María Fernanda Viecens

Abstract

This paper analyzes the effect of firm dominance on the incentives to become compatible and how compatibility decisions affect investment incentives. We will consider compatibility in two dimensions: compatibility of the complementary good and inter-network compatibility. We show that if products are substitutes, compatibility tends to be welfare decreasing with the potential negative consequences of increasing compatibility being more likely when asymmetries are strong. We also find that in many instances the dominant firm’s interests regarding compatibility are in line with those of users, and are opposite to those of the weak firm, which will always demand more compatibility to be enforced. Finally we show that compatibility may harm innovation, particularly for the dominant firm.

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Bibliographic Info

Paper provided by FEDEA in its series Working Papers with number 2009-12.

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Date of creation: Feb 2009
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Handle: RePEc:fda:fdaddt:2009-12

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  1. Bulow, Jeremy I & Geanakoplos, John D & Klemperer, Paul D, 1985. "Multimarket Oligopoly: Strategic Substitutes and Complements," Journal of Political Economy, University of Chicago Press, vol. 93(3), pages 488-511, June.
  2. Ulrich Doraszelski & Joe Harrington & Jiawei Chen, 2009. "Avoiding Market Dominance: Product Compatibility in Markets with Network Effects," 2009 Meeting Papers 30, Society for Economic Dynamics.
  3. Timothy H. Hannan & Ron Borzekowski, 2006. "Incompatibility and investment in ATM networks," Finance and Economics Discussion Series 2006-36, Board of Governors of the Federal Reserve System (U.S.).
  4. Economides, Nicholas, 1989. "Desirability of Compatibility in the Absence of Network Externalities," American Economic Review, American Economic Association, vol. 79(5), pages 1165-81, December.
  5. Toker Doganoglu & Julian Wright, 2003. "Multihoming and compatibility," Departmental Working Papers wp0314, National University of Singapore, Department of Economics.
  6. Robin S. Lee, 2007. "Vertical Integration and Exclusivity in Two-Sided Markets," Working Papers 07-39, NET Institute, revised Aug 2012.
  7. Lawrence J. White, 2007. "A New Law for the Bond Rating Industry-- For Better or For Worse?," Working Papers 07-5, New York University, Leonard N. Stern School of Business, Department of Economics.
  8. Jeffrey Church & Neil Gandal, 2000. "Systems Competition, Vertical Merger, and Foreclosure," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 9(1), pages 25-51, 03.
  9. Clements, Matthew T., 2004. "Direct and indirect network effects: are they equivalent?," International Journal of Industrial Organization, Elsevier, vol. 22(5), pages 633-645, May.
  10. Crémer, Jacques & Rey, Patrick & Tirole, Jean, 1999. "Connectivity in the Commercial Internet," IDEI Working Papers 87, Institut d'Économie Industrielle (IDEI), Toulouse, revised 2000.
  11. Michael Carter & Julian Wright, 2003. "Asymmetric Network Interconnection," Review of Industrial Organization, Springer, vol. 22(1), pages 27-46, February.
  12. Matutes, Carmen & Regibeau, Pierre, 1992. "Compatibility and Bundling of Complementary Goods in a Duopoly," Journal of Industrial Economics, Wiley Blackwell, vol. 40(1), pages 37-54, March.
  13. David A. Malueg & Marius Schwartz, 2006. "COMPATIBILITY INCENTIVES OF A LARGE NETWORK FACING MULTIPLE RIVALS -super-* ," Journal of Industrial Economics, Wiley Blackwell, vol. 54(4), pages 527-567, December.
  14. Joseph Farrell & Garth Saloner, 1984. "Standardization, Compatibility and Innovation," Working papers 345, Massachusetts Institute of Technology (MIT), Department of Economics.
  15. Jay Pil Choi, 2003. "Antitrust Analysis of Mergers with Bundling in Complementary Markets: Implications for Pricing, Innovation, and Compatibility Choice," Working Papers 03-02, NET Institute, revised Oct 2003.
  16. Church, Jeffrey & Gandal, Neil, 1992. "Network Effects, Software Provision, and Standardization," Journal of Industrial Economics, Wiley Blackwell, vol. 40(1), pages 85-103, March.
  17. Matutes, Carmen & Regibeau, Pierre, 1989. "Standardization across Markets and Entry," Journal of Industrial Economics, Wiley Blackwell, vol. 37(4), pages 359-71, June.
  18. repec:rne:rneart:v:6:y:2007:i:1:p:1-15 is not listed on IDEAS
  19. Economides, Nicholas & White, Lawrence J., 1994. "Networks and compatibility: Implications for antitrust," European Economic Review, Elsevier, vol. 38(3-4), pages 651-662, April.
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