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Strategic product compatibility in network industries

Author

Listed:
  • Domenico Buccella

    (Kozminski University)

  • Luciano Fanti

    (University of Pisa)

  • Luca Gori

    (University of Pisa)

Abstract

This article considers a product’s compatibility as a strategic variable in a Cournot duopoly with network consumption externalities. It develops a non-cooperative compatibility decision game (CDG) in which firms choose whether to let products be (in)compatible. With costless compatibility, the unique (Pareto-efficient) sub-game perfect Nash equilibrium (SPNE) of the CDG is universal compatibility. With quasi-fixed compatibility costs, the SPNE depends on whether product compatibility is an endogenous (i.e., a profit-maximising) or exogenous (i.e., given by technical constraints) variable. In the case of endogenous compatibility, the SPNE can vary from one unique to multiple regimes of (in)compatibility, such as the anti-prisoner’s dilemma (deadlock), prisoner’s dilemma, and coordination game. In the case of exogenous compatibility, the SPNE can become an anti-coordination game as well. The article also discusses the welfare outcomes corresponding to the SPNE.

Suggested Citation

  • Domenico Buccella & Luciano Fanti & Luca Gori, 2023. "Strategic product compatibility in network industries," Journal of Economics, Springer, vol. 140(2), pages 141-168, October.
    • Handle: RePEc:kap:jeczfn:v:140:y:2023:i:2:d:10.1007_s00712-023-00834-x
    DOI: 10.1007/s00712-023-00834-x
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    1. Buccella Domenico & Fanti Luciano & Gori Luca, 2024. "Product Quality and Product Compatibility in Network Industries," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 24(1), pages 299-339, January.

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    More about this item

    Keywords

    Network externality; Product compatibility; Cournot duopoly; Quasi-fixed costs;
    All these keywords.

    JEL classification:

    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • L3 - Industrial Organization - - Nonprofit Organizations and Public Enterprise
    • D4 - Microeconomics - - Market Structure, Pricing, and Design

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