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One-Way Compatibility, Two-Way Compatibility and Entry in Network Industries

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  • Fabio Manenti
  • Ernesto Somma

Abstract

We study the strategic choice of compatibility between two initially incompatible network goods in a two-stage game played by an incumbent and an entrant firm. Compatibility may be achieved by means of a converter. We derive a number of results under different assumptions about the nature of the converter (one-way vs two-way), the existence of property rights and the possibility of side payments. With incompatibility, entry deterrence occurs for sufficiently strong network effects. In the case of a two-way converter, which can only be supplied by the incumbent, incompatibility will result in equilibrium unless side payments are allowed and the network externalities are sufficiently low. When both firms can build a one-way converter and there are no property rights on the necessary technical specifications, the unique equilibrium involves full compatibility. Finally, when each firm has property rights on its technical specifications, full incompatibility is observed at the equilibrium with no side payments; when these are allowed the entrant sells access to its network to the incumbent which refuses to do the same and asymmetric one-way compatibility results in equilibrium.

Suggested Citation

  • Fabio Manenti & Ernesto Somma, 2008. "One-Way Compatibility, Two-Way Compatibility and Entry in Network Industries," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 15(3), pages 301-322.
  • Handle: RePEc:taf:ijecbs:v:15:y:2008:i:3:p:301-322 DOI: 10.1080/13571510802465096
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    Cited by:

    1. Norbäck, Pehr-Johan & Persson, Lars & Tå̊g, Joacim, 2014. "Acquisitions, entry, and innovation in oligopolistic network industries," International Journal of Industrial Organization, Elsevier, pages 1-12.
    2. Etziony Amir & Weiss Avi, 2012. "Inviting Competition to Achieve Critical Mass," Review of Network Economics, De Gruyter, pages 1-22.

    More about this item

    Keywords

    Network Externalities; One-way Compatibility; Two-way compatibility; Entry;

    JEL classification:

    • 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
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection

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