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Compatibility choice in vertically differentiated technologies

  • GARCIA, Filomena

    (ISEG, Technical University of Lisbon)

  • VERGARI, Cecilia

    (Université catholique de Louvain (UCL). Center for Operations Research and Econometrics (CORE))

We analyse firms' incentives to provide two-way compatibility between two network goods with different intrinsic qualities. We study how the relative importance of vertical differentiation with respect to the network effect influences the price competition as well as the compatibility choice. The final degree of compatibility allows firms to manipulate the overall differentiation. Under weak network effect, full compatibility may arise: the low quality firm has higher incentives to offer it in order to prevent the rival from dominating the market. Under strong network effect we observe multiple equilibria for consumers' demands. However, in any equilibrium of the full game, coordination takes place on the high quality good which, we assume, always maintains its overall quality dominance.

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Paper provided by Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) in its series CORE Discussion Papers with number 2008014.

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Date of creation: 01 Mar 2008
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Handle: RePEc:cor:louvco:2008014
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