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Quality competition and product compatibility in network industries

Author

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  • Yi-Ling Cheng

    (National Sun Yat-sen University)

  • Hsiang-Yun Huang

    (National Sun Yat-sen University)

Abstract

This paper investigates the interplay between product compatibility and quality competition in network industries. Our findings indicate that when firms have veto power over product compatibility, high network externalities inevitably lead to incompatibility, making compatibility unattainable. Without veto power, however, compatibility always emerges. This suggests that patent protection may impede compatibility, particularly in the presence of significant network externalities. Moreover, our results highlight the benefits of compatibility, including improved product quality, higher profits, increased consumer surplus, and overall welfare. We further demonstrate that an increase in externalities boosts product quality when products are compatible but reduces it when they are incompatible, while expanding vertical product differentiation in both cases.

Suggested Citation

  • Yi-Ling Cheng & Hsiang-Yun Huang, 2025. "Quality competition and product compatibility in network industries," Journal of Economics, Springer, vol. 145(1), pages 31-57, June.
    • Handle: RePEc:kap:jeczfn:v:145:y:2025:i:1:d:10.1007_s00712-024-00896-5
    DOI: 10.1007/s00712-024-00896-5
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    References listed on IDEAS

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    More about this item

    Keywords

    Product compatibility; Quality competition; Network externalities; Vertical product differentiation;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality

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