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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.

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Bibliographic 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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Web page: http://128.118.178.162

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References

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  1. Church, Jeffrey & Gandal, Neil, 1992. "Network Effects, Software Provision, and Standardization," Journal of Industrial Economics, Wiley Blackwell, vol. 40(1), pages 85-103, March.
  2. Michael L. Katz & Carl Shapiro, 1994. "Systems Competition and Network Effects," Journal of Economic Perspectives, American Economic Association, vol. 8(2), pages 93-115, Spring.
  3. Joseph Farrell & Garth Saloner, 1986. "Installed Base and Compatibility, With Implications for Product Preannouncements," Working papers 411, Massachusetts Institute of Technology (MIT), Department of Economics.
  4. Katz, Michael L & Shapiro, Carl, 1985. "Network Externalities, Competition, and Compatibility," American Economic Review, American Economic Association, vol. 75(3), pages 424-40, June.
  5. Katz, Michael L & Shapiro, Carl, 1986. "Technology Adoption in the Presence of Network Externalities," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 822-41, August.
  6. Church, J. & Gandal, N., 1991. "Complementary Network Externalities and Technological Adoption," Papers 5-91, Tel Aviv.
  7. Church, J. & Gandal, N., 1992. "Integration, Complementary Products and Variety," Papers 3-92, Tel Aviv.
  8. Joseph Farrell & Garth Saloner, 1984. "Standardization, Compatibility and Innovation," Working papers 345, Massachusetts Institute of Technology (MIT), Department of Economics.
  9. Chou, Chien-fu & Shy, Oz, 1990. "Network effects without network externalities," International Journal of Industrial Organization, Elsevier, vol. 8(2), pages 259-270, June.
  10. Economides, Nicholas & Salop, Steven C, 1992. "Competition and Integration among Complements, and Network Market Structure," Journal of Industrial Economics, Wiley Blackwell, vol. 40(1), pages 105-23, March.
  11. Dixit, Avinash K & Stiglitz, Joseph E, 1975. "Monopolistic Competition and Optimum Product Diversity," The Warwick Economics Research Paper Series (TWERPS) 64, University of Warwick, Department of Economics.
  12. Shy, O. & Chou, C-F., 1990. "Do Consumers Always Gain When More People Buy The Same Brand?," Papers 40-90, Tel Aviv.
  13. 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.
  14. 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.
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Cited by:
  1. Iwasa, Kazumichi & Kikuchi, Toru, 2007. "Indirect Network Effects, Trade Liberalization, and Excess Standardization," MPRA Paper 4399, University Library of Munich, Germany.
  2. 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.
  3. Chavas, Jean-Paul & Barham, Bradford, 2007. "On the Microeconomics of Diversification under Uncertainty and Learning," Staff Paper Series 515, University of Wisconsin, Agricultural and Applied Economics.
  4. 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.
  5. 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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