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

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  • Dominique Desruelle

    (International Monetary Fund)

  • Gerard Gaudet

    (Universite Laval)

  • Yves Richelle

    (Universite Laval)

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.

Suggested Citation

  • Dominique Desruelle & Gerard Gaudet & Yves Richelle, 1995. "Complementarity, Coordination and Compatibility: The Role of Fixed Costs in the Economics of Systems," Industrial Organization 9508001, University Library of Munich, Germany, revised 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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    References listed on IDEAS

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    Cited by:

    1. Chavas, Jean-Paul & Barham, Bradford L., 2007. "On the Microeconomics of Diversification under Uncertainty and Learning," Staff Papers 92141, University of Wisconsin-Madison, Department of Agricultural and Applied Economics.
    2. Paul Belleflamme & Eric Toulemonde, 2003. "Product differentiation in successive vertical oligopolies," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 36(3), pages 523-545, August.
    3. Kazumichi Iwasa & Toru Kikuchi, 2009. "Indirect network effects and the impact of trade liberalization: A note," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 18(4), pages 541-552.
    4. Kiss, Károly Miklós & Lengyel, Balázs & Lőrincz, László & Elekes, Zoltán & Csáfordi, Zsolt, 2019. "Az iparágak közti hasonlóság mérésének hálózati módszerei és relevanciájuk a gazdaságfejlesztésben [Network methods for measuring inter-industrial similarity and the relevance of them to economic d," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(1), pages 22-52.
    5. Iwasa, Kazumichi & Kikuchi, Toru, 2007. "Indirect Network Effects, Trade Liberalization, and Excess Standardization," MPRA Paper 4399, University Library of Munich, Germany.
    6. Woeckener, Bernd, 1998. "Network effects, compatibility decisions, and monopolization," Tübinger Diskussionsbeiträge 125, University of Tübingen, School of Business and Economics.
    7. Chavas, Jean-Paul & Kim, Kwansoo, 2010. "Economies of diversification: A generalization and decomposition of economies of scope," International Journal of Production Economics, Elsevier, vol. 126(2), pages 229-235, August.
    8. Carlaw, Kenneth I., 2004. "Returns to scale generated from uncertainty and complementarity," Journal of Economic Behavior & Organization, Elsevier, vol. 53(2), pages 261-282, February.

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