1On endogenous Stackelberg leadership: The case of horizontally differentiated duopoly and asymmetric net work compatibility effects

Introducing product compatibility associated with network externalities (hereafter, network compatibility effects) into a horizontally differentiated duopoly model, we consider how network compatibility effects and the level of product substitutability affect endogenous timing decisions in the cases of quantity- and price-setting competition. In particular, we demonstrate the following. First, given asymmetric network compatibility effects between the products of the firms, there is Stackelberg equilibrium where the firm providing a product with a larger network compatibility effect than some certain level of product substitutability emerges as a leader (follower), whereas the firm providing a product with a smaller network compatibility effect than some certain level of product substitutability emerges as a follower (leader) in the case of quantity (price)-setting competition. Second, the Stackelberg equilibrium is Pareto-superior for both firms compared with other equilibria. However, with alternative formulation determining network size, with respect to the endogenous Stackelberg leader−follower relationship, the revers holds.