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Dynamics of Compatibility under Switching Costs

Author

Listed:
  • Doh-Shin Jeon

    () (Toulouse School of Economics and CEPR, 21 allees de Brienne, 31000 Toulouse, France)

  • Domenico Menicucci

    () (Dipartimento di Scienze per l'Economia e l'impresa, Università degli Studi di Firenze, Via delle Pandette 9, I-50127 Firenze (FI), Italy)

  • Nikrooz Nasr

    () (Toulouse School of Economics, 21 allees de Brienne, 31000 Toulouse, France)

Abstract

We study firms’ choices of compatibility in a dynamic setting. Current compatibility choice shapes the distribution of consumers’ switching costs and thereby affects competition and compatibility choice in the future. Given today’s market shares, the dynamics of compatibility is asymmetric in that firms are more likely to embrace compatibility tomorrow if products are compatible today but no such inertia exists for incompatibility. However, this asymmetry disappears when the market shares are endogenous. Contrary to what happens in a static setting, when consumer lock-in arises due to a significant switching cost, firms make their systems incompatible in order to soften future competition, which hurts consumers and tends to reduce welfare.

Suggested Citation

  • Doh-Shin Jeon & Domenico Menicucci & Nikrooz Nasr, 2015. "Dynamics of Compatibility under Switching Costs," Working Papers 15-17, NET Institute, revised Oct 2015.
  • Handle: RePEc:net:wpaper:1517
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    File URL: http://www.netinst.org/Jeon_Menicucci_Nasr_15-17.pdf
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    References listed on IDEAS

    as
    1. Hanming Fang & Peter Norman, 2006. "To bundle or not to bundle," RAND Journal of Economics, RAND Corporation, vol. 37(4), pages 946-963, December.
    2. John Thanassoulis, 2011. "Is Multimedia Convergence To Be Welcomed?," Journal of Industrial Economics, Wiley Blackwell, vol. 59(2), pages 225-253, June.
    3. Yongmin Chen, 1997. "Paying Customers to Switch," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 6(4), pages 877-897, December.
    4. Jong-Hee Hahn & Sang-Hyun Kim, 2012. "Mix-and-Match Compatibility in Asymmetric System Markets," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 168(2), pages 311-338, June.
    5. Drew Fudenberg & Jean Tirole, 2000. "Customer Poaching and Brand Switching," RAND Journal of Economics, The RAND Corporation, vol. 31(4), pages 634-657, Winter.
    6. 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.
    7. Hurkens, Sjaak & Jeon, Doh-Shin & Menicucci, Domenico, 2013. "Dominance and Competitive Bundling," TSE Working Papers 13-423, Toulouse School of Economics (TSE), revised May 2018.
    8. Yannis Bakos & Erik Brynjolfsson, 1999. "Bundling Information Goods: Pricing, Profits, and Efficiency," Management Science, INFORMS, vol. 45(12), pages 1613-1630, December.
    9. repec:rje:randje:v:37:y:2006:i:4:p:946-963 is not listed on IDEAS
    10. Peitz, Martin, 2008. "Bundling may blockade entry," International Journal of Industrial Organization, Elsevier, vol. 26(1), pages 41-58, January.
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    More about this item

    Keywords

    (In)Compatibility; Dynamics; Lock-in; Switching Cost;

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices

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