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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 others 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.

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Bibliographic Info

Paper provided by The Johns Hopkins University,Department of Economics in its series Economics Working Paper Archive with number 537.

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Date of creation: Sep 2008
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Handle: RePEc:jhu:papers:537

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  1. David Besanko & Ulrich Doraszelski, 2004. "Capacity Dynamics and Endogenous Asymmetries in Firm Size," RAND Journal of Economics, The RAND Corporation, vol. 35(1), pages 23-49, Spring.
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  8. Katz, Michael L & Shapiro, Carl, 1985. "Network Externalities, Competition, and Compatibility," American Economic Review, American Economic Association, vol. 75(3), pages 424-40, June.
  9. Choi, Jay Pil, 1997. "The Provision of (Two-Way) Converters in the Transition Process to a New Incompatible Technology," Journal of Industrial Economics, Wiley Blackwell, vol. 45(2), pages 139-53, June.
  10. Skrzypacz, Andrzej & Mitchell, Matthew F., 2005. "Network Externalities and Long-Run Market Shares," Research Papers 1879, Stanford University, Graduate School of Business.
  11. Gerard Llobet & Michael Manove, 2006. "Network Size and Network Capture," Boston University - Department of Economics - Working Papers Series WP2006-007, Boston University - Department of Economics.
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  13. repec:fth:coluec:716 is not listed on IDEAS
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  16. Nicholas Economides & Fredrick Flyer, 1997. "Compatibility and Market Structure for Network Goods," Working Papers 98-02, New York University, Leonard N. Stern School of Business, Department of Economics.
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Cited by:
  1. Amir, Rabah & Lazzati, Natalia, 2011. "Network effects, market structure and industry performance," Journal of Economic Theory, Elsevier, vol. 146(6), pages 2389-2419.
  2. Luís Cabral, 2011. "Dynamic Price Competition with Network Effects," Review of Economic Studies, Oxford University Press, vol. 78(1), pages 83-111.
  3. 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 7560, C.E.P.R. Discussion Papers.
  4. Miller, Amalia R. & Tucker, Catherine, 2014. "Health information exchange, system size and information silos," Journal of Health Economics, Elsevier, vol. 33(C), pages 28-42.
  5. Ulrich Doraszelski & Mark Satterthwaite, 2007. "Computable Markov-Perfect Industry Dynamics: Existence, Purification, and Multiplicity," Levine's Bibliography 321307000000000912, UCLA Department of Economics.
  6. Griva, Krina & Vettas, Nikolaos, 2011. "Price competition in a differentiated products duopoly under network effects," Information Economics and Policy, Elsevier, vol. 23(1), pages 85-97, March.
  7. Doraszelski, Ulrich & Satterthwaite, Mark, 2007. "Computable Markov-Perfect Industry Dynamics: Existence, Purification, and Multiplicity," CEPR Discussion Papers 6212, C.E.P.R. Discussion Papers.
  8. Oz Shy, 2011. "A Short Survey of Network Economics," Review of Industrial Organization, Springer, vol. 38(2), pages 119-149, March.
  9. María Fernanda Viecens, 2009. "Compatibility with Firm Dominance," Working Papers 2009-12, FEDEA.
  10. 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, vol. 10(2), pages 197-229, June.
  11. Laussel, Didier & Resende, Joana, 2014. "Dynamic price competition in aftermarkets with network effects," Journal of Mathematical Economics, Elsevier, vol. 50(C), pages 106-118.
  12. Alexander White & E. Glen Weyl, 2010. "Imperfect Platform Competition: A General Framework," Working Papers 10-17, NET Institute, revised Nov 2010.

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