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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)

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

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

Note: Type of Document - pdf; pages: 31
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Web page: http://129.3.20.41

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Related research
Keywords: standards; coalition formation; network effects;

Find related papers by JEL classification:
D4 - Microeconomics - - Market Structure and Pricing
L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance

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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. Rubinstein, Ariel, 1982. "Perfect Equilibrium in a Bargaining Model," Econometrica, Econometric Society, vol. 50(1), pages 97-109, January. [Downloadable!] (restricted)
  2. Ray, Debraj & Vohra, Rajiv, 1997. "Equilibrium Binding Agreements," Journal of Economic Theory, Elsevier, vol. 73(1), pages 30-78, March. [Downloadable!] (restricted)
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  3. Francis Bloch, 1995. "Endogenous Structures of Association in Oligopolies," RAND Journal of Economics, The RAND Corporation, vol. 26(3), pages 537-556, Autumn. [Downloadable!] (restricted)
  4. Chatterjee, Kalyan & Bhaskar Dutta & Debraj Ray & Kunal Sengupta, 1993. "A Noncooperative Theory of Coalitional Bargaining," Review of Economic Studies, Blackwell Publishing, vol. 60(2), pages 463-77, April. [Downloadable!] (restricted)
  5. Ray, Debraj & Vohra, Rajiv, 1999. "A Theory of Endogenous Coalition Structures," Games and Economic Behavior, Elsevier, vol. 26(2), pages 286-336, January. [Downloadable!] (restricted)
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  6. 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. [Downloadable!]
  7. 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. [Downloadable!] (restricted)
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  1. Attila Ambrus & Rosella Argenziano, 2004. "Network Markets and Consumer Coordination," IEHAS Discussion Papers 0423, Institute of Economics, Hungarian Academy of Sciences. [Downloadable!]
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