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Compatibility with Firm Dominance

Author Info

Listed author(s):
  • 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
Handle: RePEc:fda:fdaddt:2009-12
Contact details of provider: Web page: http://www.fedea.net

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  1. Joseph Farrell & Garth Saloner, 1985. "Standardization, Compatibility, and Innovation," RAND Journal of Economics, The RAND Corporation, vol. 16(1), pages 70-83, Spring.
  2. 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.
  3. Nicholas Economides & Evangelos Katsamakas, 2005. "Linux vs. Windows: A comparison of application and platform innovation incentives for open source and proprietary software platforms+," Working Papers 05-03, NET Institute, revised Sep 2005.
  4. Jeffrey Church & Neil Gandal, 2000. "Systems Competition, Vertical Merger, and Foreclosure," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 9(1), pages 25-51, 03.
  5. Doganoglu, Toker & Wright, Julian, 2006. "Multihoming and compatibility," International Journal of Industrial Organization, Elsevier, vol. 24(1), pages 45-67, January.
  6. repec:bpj:rneart:v:6:y:2007:i:1:p:1-15 is not listed on IDEAS
  7. Bulow, Jeremy I & Geanakoplos, John D & Klemperer, Paul D, 1985. "Multimarket Oligopoly: Strategic Substitutes and Complements," Journal of Political Economy, University of Chicago Press, vol. 93(3), pages 488-511, June.
  8. Jiawei Chen & Ulrich Doraszelski & Joseph E. Harrington, Jr., 2009. "Avoiding market dominance: product compatibility in markets with network effects," RAND Journal of Economics, RAND Corporation, vol. 40(3), pages 455-485.
  9. 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.
  10. Hannan Timothy H. & Borzekowski Ron, 2007. "Incompatibility and Investment in ATM Networks," Review of Network Economics, De Gruyter, vol. 6(1), pages 1-15, March.
  11. Matutes, Carmen & Regibeau, Pierre, 1989. "Standardization across Markets and Entry," Journal of Industrial Economics, Wiley Blackwell, vol. 37(4), pages 359-371, June.
  12. Michael Carter & Julian Wright, 2003. "Asymmetric Network Interconnection," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 22(1), pages 27-46, February.
  13. Economides, Nicholas & White, Lawrence J., 1994. "Networks and compatibility: Implications for antitrust," European Economic Review, Elsevier, vol. 38(3-4), pages 651-662, April.
  14. Cremer, Jacques & Rey, Patrick & Tirole, Jean, 2000. "Connectivity in the Commercial Internet," Journal of Industrial Economics, Wiley Blackwell, vol. 48(4), pages 433-472, December.
  15. Church, Jeffrey & Gandal, Neil, 1992. "Network Effects, Software Provision, and Standardization," Journal of Industrial Economics, Wiley Blackwell, vol. 40(1), pages 85-103, March.
  16. David A. Malueg & Marius Schwartz, 2006. "COMPATIBILITY INCENTIVES OF A LARGE NETWORK FACING MULTIPLE RIVALS -super-," Journal of Industrial Economics, Wiley Blackwell, vol. 54(4), pages 527-567, December.
  17. 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.
  18. Economides, Nicholas, 1989. "Desirability of Compatibility in the Absence of Network Externalities," American Economic Review, American Economic Association, vol. 79(5), pages 1165-1181, December.
  19. 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.
  20. Robin S. Lee, 2007. "Vertical Integration and Exclusivity in Two-Sided Markets," Working Papers 07-39, NET Institute, revised Aug 2012.
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Cited by:

  1. Maruyama Masayoshi & Zennyo Yusuke, 2013. "Compatibility and the Product Life Cycle in Two-Sided Markets," Review of Network Economics, De Gruyter, vol. 12(2), pages 131-155, June.
  2. 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.
  3. 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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