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Endogenous product compatibility choice under Cournot competition with a network externality

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  • Tsuyoshi Toshimitsu

    () (School of Economics, Kwansei Gakuin University)

Abstract

We provide a simple model of endogenous product compatibility choice under Cournot competition with a network externality. Using the model, we consider how the degree of a network externality and product substitutability affects the choice regarding product compatibility. In particular, if the degree of the network externality is larger than that of the product substitutability, there exist multiple equilibria, involving imperfect, partial, and perfect compatibility. However, if another assumption formula regarding a spillover effect, which is a component of network size, is made, i.e., the converter case, there is a unique equilibrium, i.e., perfect compatibility, irrespective of the degree of the network effect versus product substitutability. Furthermore, we show that a perfectly compatible product standard is socially optimal and analyze, therefore, whether a social dilemma arises in the network products market.

Suggested Citation

  • Tsuyoshi Toshimitsu, 2014. "Endogenous product compatibility choice under Cournot competition with a network externality," Discussion Paper Series 115, School of Economics, Kwansei Gakuin University, revised Jan 2014.
  • Handle: RePEc:kgu:wpaper:115
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    File Function: First version, 2014
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    More about this item

    Keywords

    product compatibility; network externality; fulfilled expectation; Cournot duopoly; horizontally differentiated product;

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality

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