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Complementarity, Coordination and Compatibility: The Role of Fixed Costs in the Economics of Systems

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Author Info
Dominique Desruelle (International Monetary Fund)
Gerard Gaudet (Universite Laval)
Yves Richelle (Universite Laval)

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Abstract

We analyze industry equilibrium and incentive to compatibility when goods produced by different producers generate utility only when consumed as component parts of a system. We assume the presence of two systems, each composed of some basic component and a set of differentiated complementary products. The combination of complementarity between the two components of the system and of fixed costs in the production of the complementary product results in a form of network effect. We focus on the role played by the size of the fixed costs in the production of the complementary products in determining the size of this system effect and, by this means, the structure and types of equilibria that may be observed: monopolistic or duopolistic, symmetric or asymmetric. We also highlight the consequence of the same fixed costs for the private and social incentives to render the systems compatible.

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Publisher Info
Paper provided by EconWPA in its series Industrial Organization with number 9508001.

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Length: 30 pages
Date of creation: 11 Aug 1995
Date of revision: 14 Aug 1995
Handle: RePEc:wpa:wuwpio:9508001

Note: 30 pages. This is a considerably revised version of Working Paper 9209, Departement des sciences economiques, Universite du Quebec a Montreal.
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L - Industrial Organization

References listed on IDEAS
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. Church, Jeffrey & Gandal, Neil, 1992. "Network Effects, Software Provision, and Standardization," Journal of Industrial Economics, Blackwell Publishing, vol. 40(1), pages 85-103, March. [Downloadable!] (restricted)
  2. Joseph Farrell & Garth Saloner, 1985. "Installed Base and Compatibility With Implications for Product Preannouncements," Working papers 385, Massachusetts Institute of Technology (MIT), Department of Economics.
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  3. Economides, Nicholas & Salop, Steven C, 1992. "Competition and Integration among Complements, and Network Market Structure," Journal of Industrial Economics, Blackwell Publishing, vol. 40(1), pages 105-23, March. [Downloadable!] (restricted)
  4. Joseph Farrell & Garth Saloner, 1984. "Standardization, Compatibility and Innovation," Working papers 345, Massachusetts Institute of Technology (MIT), Department of Economics.
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  5. Dominique Desruelle & Gérard Gaudet & Yves Richelle, 1992. "Complementarity, Coordination and Compatibility: An Analysis of the Economics of Systems," Cahiers de recherche du Département des sciences économiques, UQAM 9209, Université du Québec à Montréal, Département des sciences économiques.
  6. Katz, Michael L & Shapiro, Carl, 1985. "Network Externalities, Competition, and Compatibility," American Economic Review, American Economic Association, vol. 75(3), pages 424-40, June. [Downloadable!] (restricted)
  7. Church, Jeffrey & Gandal, Neil, 1992. "Integration, Complementary Products, and Variety," Journal of Economics & Management Strategy, Blackwell Publishing, vol. 1(4), pages 651-75, Winter.
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Cited by:
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  1. Kazumichi, Iwasa & Kikuchi, Toru, 2008. "Indirect Network E ects and the Impact of Trade Liberalization: A Note," MPRA Paper 8662, University Library of Munich, Germany. [Downloadable!]
  2. Iwasa, Kazumichi & Kikuchi, Toru, 2007. "Indirect Network Effects, Trade Liberalization, and Excess Standardization," MPRA Paper 4399, University Library of Munich, Germany. [Downloadable!]
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