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Standards Coalitions Formation and Market Structure in Network Industries

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Author Info

  • Nicholas Economides

    (Stern School of Business, New York University)

  • Andrzej Skrzypacz

    (GSB, Stanford University)

Abstract

We discuss the formation of technical standards platforms in industries with network externalities where firms are free to choose their degree of technical compatibility with competitors. In our model, firms choose affiliation to a technical standards coalition in the first stage of a game, and play an oligopoly game in the second stage. In adding itself to a technical standards coalition, a firm benefits from the network effects of the whole coalition, but also faces increased competition in the output market from other firms in the coalition. Also, the increase of the size of the coalition changes the competitive position of members of that coalition relative to other firms. We find that the extent and size of coalitions at equilibrium depends crucially on the degree of the intensity of network effects. When network effects are very strong, full compatibility prevails. When externalities are slightly weaker, two standards coalitions are formed, a singleton, and one with all remaining firms. On the other extreme, for very weak network effects, the equilibrium is total incompatibility, and for slightly more intense network effects, coalitions are of small size. We characterize a number of other equilibria for intermediate strengths of network externalities.

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File URL: http://128.118.178.162/eps/mic/papers/0407/0407008.pdf
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Bibliographic Info

Paper provided by EconWPA in its series Microeconomics with number 0407008.

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Length: 31 pages
Date of creation: 14 Jul 2004
Date of revision:
Handle: RePEc:wpa:wuwpmi:0407008

Note: Type of Document - pdf; pages: 31
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Web page: http://128.118.178.162

Related research

Keywords: standards; coalition formation; network effects;

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References

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  1. Debraj Ray & Rajiv Vohra, 1996. "A Theory of Endogenous Coalition Structure," Papers 0068, Boston University - Industry Studies Programme.
  2. Chatterjee, Kalyan & Bhaskar Dutta & Debraj Ray & Kunal Sengupta, 1993. "A Noncooperative Theory of Coalitional Bargaining," Review of Economic Studies, Wiley Blackwell, vol. 60(2), pages 463-77, April.
  3. Rubinstein, Ariel, 1982. "Perfect Equilibrium in a Bargaining Model," Econometrica, Econometric Society, vol. 50(1), pages 97-109, January.
  4. Bloch, Francis, 1996. "Sequential Formation of Coalitions in Games with Externalities and Fixed Payoff Division," Games and Economic Behavior, Elsevier, vol. 14(1), pages 90-123, May.
  5. Ray, D. & Vohra, R., 1993. "Equilibrium Binding Agreements," Papers 21, Boston University - Department of Economics.
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Cited by:
  1. Dobrescu, Emilian, 2011. "Sectoral Structure and Economic Growth," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(3), pages 5-36, September.
  2. Argenziano, Rossella & Ambrus, Attila, 2009. "Asymmetric Networks in Two-sided Markets," Scholarly Articles 4589709, Harvard University Department of Economics.
  3. Christ, Julian P. & Slowak, André P., 2009. "Why Blu-ray vs. HD-DVD is not VHS vs. Betamax: The co-evolution of standard-setting consortia," Violette Reihe Arbeitspapiere 29/2009, Promotionsschwerpunkt "Globalisierung und Beschaeftigung".
  4. Attila Ambrus & Rosella Argenziano, 2004. "Network Markets and Consumer Coordination," IEHAS Discussion Papers 0423, Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences.

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