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Compatibility Decisions, Endogenous Installed Home Bases and the Third-Market Competition

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  • Walz, Uwe
  • Woeckener, Bernd

Abstract

This Paper analyses the compatibility decisions of two regional monopolistic suppliers of a network-effect good who first build up installed bases in their respective home region and then compete in a third market. We show that with weak network effects, installed home bases always are higher under compatibility and suppliers always opt for compatibility. With strong network effects, home markets are covered, and given a sufficiently high home-market size advantage both the favoured supplier and a regional standardization body maintain incompatibility in order (to enable the supplier) to monopolize the third market via limit pricing. As incompatibility always results in a welfare loss, this is a strong case for a global standardization body.

Suggested Citation

  • Walz, Uwe & Woeckener, Bernd, 2003. "Compatibility Decisions, Endogenous Installed Home Bases and the Third-Market Competition," CEPR Discussion Papers 3816, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:3816
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    References listed on IDEAS

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    1. Church, Jeffrey & Gandal, Neil, 1992. "Network Effects, Software Provision, and Standardization," Journal of Industrial Economics, Wiley Blackwell, vol. 40(1), pages 85-103, March.
    2. Farrell, Joseph & Saloner, Garth, 1992. "Converters, Compatibility, and the Control of Interfaces," Journal of Industrial Economics, Wiley Blackwell, vol. 40(1), pages 9-35, March.
    3. Barrett, Christopher B. & Yang, Yi-Nung, 2001. "Rational incompatibility with international product standards," Journal of International Economics, Elsevier, vol. 54(1), pages 171-191, June.
    4. Chou, Chien-fu & Shy, Oz, 1990. "Network effects without network externalities," International Journal of Industrial Organization, Elsevier, vol. 8(2), pages 259-270, June.
    5. Gandal, Neil & Shy, Oz, 2001. "Standardization policy and international trade," Journal of International Economics, Elsevier, vol. 53(2), pages 363-383, April.
    6. Matutes, Carmen & Regibeau, Pierre, 1996. "A selective review of the economics of standardization. Entry deterrence, technological progress and international competition," European Journal of Political Economy, Elsevier, vol. 12(2), pages 183-209, September.
    7. Funk, Jeffrey L. & Methe, David T., 2001. "Market- and committee-based mechanisms in the creation and diffusion of global industry standards: the case of mobile communication," Research Policy, Elsevier, vol. 30(4), pages 589-610, April.
    8. Pargal, Sheoli, 1996. "Do incompatible network standards lead to domestic benefits? The case of color television," Information Economics and Policy, Elsevier, vol. 8(3), pages 205-227, September.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    compatibility decisions; installed home base; international network effects; standardization bodies; third-market competition;

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality

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