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Compatibility with Firm Dominance

Author Info

  • María Fernanda Viecens

Abstract

This paper analyzes the effect of firm dominance on the incentives to become compatible and how compatibility decisions affect investment incentives. We will consider compatibility in two dimensions: compatibility of the complementary good and inter-network compatibility. We show that if products are substitutes, compatibility tends to be welfare decreasing with the potential negative consequences of increasing compatibility being more likely when asymmetries are strong. We also find that in many instances the dominant firm’s interests regarding compatibility are in line with those of users, and are opposite to those of the weak firm, which will always demand more compatibility to be enforced. Finally we show that compatibility may harm innovation, particularly for the dominant firm.

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File URL: http://documentos.fedea.net/pubs/dt/2009/dt-2009-12.pdf
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Paper provided by FEDEA in its series Working Papers with number 2009-12.

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Date of creation: Feb 2009
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Handle: RePEc:fda:fdaddt:2009-12
Contact details of provider: Web page: http://www.fedea.net

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  13. repec:bpj:rneart:v:6:y:2007:i:1:p:1-15 is not listed on IDEAS
  14. Luis Cabral & Ben Polak, 2007. "Dominant Firms, Imitation, and Incentives to Innovate," Working Papers 07-5, New York University, Leonard N. Stern School of Business, Department of Economics.
  15. Clements, Matthew T., 2004. "Direct and indirect network effects: are they equivalent?," International Journal of Industrial Organization, Elsevier, vol. 22(5), pages 633-645, May.
  16. Timothy H. Hannan & Ron Borzekowski, 2006. "Incompatibility and investment in ATM networks," Finance and Economics Discussion Series 2006-36, Board of Governors of the Federal Reserve System (U.S.).
  17. Michael Carter & Julian Wright, 2003. "Asymmetric Network Interconnection," Review of Industrial Organization, Springer, vol. 22(1), pages 27-46, February.
  18. Jay Pil Choi, 2003. "Antitrust Analysis of Mergers with Bundling in Complementary Markets: Implications for Pricing, Innovation, and Compatibility Choice," Working Papers 03-02, NET Institute, revised Oct 2003.
  19. Robin S. Lee, 2007. "Vertical Integration and Exclusivity in Two-Sided Markets," Working Papers 07-39, NET Institute, revised Aug 2012.
  20. Matutes, Carmen & Regibeau, Pierre, 1992. "Compatibility and Bundling of Complementary Goods in a Duopoly," Journal of Industrial Economics, Wiley Blackwell, vol. 40(1), pages 37-54, March.
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Cited by:

  1. Athanasopoulos, Thanos, 2014. "Compatibility, Intellectual Property,Innovation and Welfare in Durable Goods Markets with Network Effects," The Warwick Economics Research Paper Series (TWERPS) 1043, University of Warwick, Department of Economics.
  2. Maruyama, Masayoshi & Zennyo, Yusuke, 2015. "Application compatibility and affiliation in two-sided markets," Economics Letters, Elsevier, vol. 130(C), pages 39-42.

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