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An Oligopoly Game with Network Effects for Compatible and Incompatible Standards: As Applied to Short and Multimedia Message Services

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  • Porchiung Ben Chou

    (Martin Tuchman School of Management, New Jersey Institute of Technology, USA)

  • Cesar Bandera

    (Martin Tuchman School of Management, New Jersey Institute of Technology, USA)

Abstract

We develop a game theoretical model to characterize how two oligopoly firms choose the levels of standards compatibility or interoperability in the context of short and multimedia message services (MMS). When the network effect is strong, both firms choose the ratified standards that are completely interoperable, as in the case of short message service (SMS) worldwide. In contrast, when the network effect is weak, as in the case of MMS in the U.S., it is more likely that firms pursue partially incompatible protocols that differ from the ratified standard. Such an equilibrium is similar to the prisoner’s dilemma game as the firms reach the inefficient equilibrium. At the same time, when the government intervenes in choosing messaging protocols, it is also possible for the firms to reach the efficient equilibrium, as in the case of MMS in China.

Suggested Citation

  • Porchiung Ben Chou & Cesar Bandera, 2020. "An Oligopoly Game with Network Effects for Compatible and Incompatible Standards: As Applied to Short and Multimedia Message Services," International Journal of Business and Economics, School of Management Development, Feng Chia University, Taichung, Taiwan, vol. 19(1), pages 27-46, June.
    • Handle: RePEc:ijb:journl:v:19:y:2020:i:1:p:27-46
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    References listed on IDEAS

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    Cited by:

    1. John S. Heywood & Zerong Wang & Guangliang Ye, 2022. "R&D rivalry with endogenous compatibility," Manchester School, University of Manchester, vol. 90(3), pages 354-384, June.

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    More about this item

    Keywords

    Compatible and incompatible standards; interoperability; multimedia message service (MMS); Nash equilibrium; network effect; oligopoly; prisoner’s dilemma game; short message services (SMS);
    All these keywords.

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
    • L96 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Telecommunications

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