IDEAS home Printed from
   My bibliography  Save this paper

Optimal Compatibility in Systems Markets


  • Sang-Hyun Kim

    (University of East Anglia)

  • Jay Pil Choi

    (University of New South Wales)


We analyze private and social incentives for standardization to ensure market-wide system compatibility in a two-dimensional spatial competition model. It is shown that there is a fundamental conflict of interest between consumers and producers over the standardization decision. Consumers prefer standardization with full compatibility because it offers more variety that confers better match with their ideal specifications. However, firms are likely to choose the minimum compatibility to maximize product differentiation and soften competition. This is in sharp contrast to the previous literature that shows the alignment of private and social incentives for compatibility. We also characterize the free-entry equilibria under the maximum and the minimum compatibility. With free entry, more firms enter without standardization, but the number of available system variety is less than the one under standardization.

Suggested Citation

  • Sang-Hyun Kim & Jay Pil Choi, 2014. "Optimal Compatibility in Systems Markets," University of East Anglia Applied and Financial Economics Working Paper Series 057, School of Economics, University of East Anglia, Norwich, UK..
  • Handle: RePEc:uea:aepppr:2012_57

    Download full text from publisher

    File URL:
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    1. Denicolo, Vincenzo, 2000. "Compatibility and Bundling with Generalist and Specialist Firms," Journal of Industrial Economics, Wiley Blackwell, vol. 48(2), pages 177-188, June.
    2. Jeffrey M. Perloff & Steven C. Salop, 1985. "Equilibrium with Product Differentiation," Review of Economic Studies, Oxford University Press, vol. 52(1), pages 107-120.
    3. Besanko, David & Perry, Martin K., 1994. "Exclusive dealing in a spatial model of retail competition," International Journal of Industrial Organization, Elsevier, vol. 12(3), pages 297-329, September.
    4. Jean‐Charles Rochet & Jean Tirole, 2006. "Two‐sided markets: a progress report," RAND Journal of Economics, RAND Corporation, vol. 37(3), pages 645-667, September.
    5. Irmen, Andreas & Thisse, Jacques-Francois, 1998. "Competition in Multi-characteristics Spaces: Hotelling Was Almost Right," Journal of Economic Theory, Elsevier, vol. 78(1), pages 76-102, January.
    6. Steven C. Salop, 1979. "Monopolistic Competition with Outside Goods," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 141-156, Spring.
    7. Bonanno, Giacomo & Vickers, John, 1988. "Vertical Separation," Journal of Industrial Economics, Wiley Blackwell, vol. 36(3), pages 257-265, March.
    8. d'Aspremont, C & Gabszewicz, Jean Jaskold & Thisse, J-F, 1979. "On Hotelling's "Stability in Competition"," Econometrica, Econometric Society, vol. 47(5), pages 1145-1150, September.
    9. Jay Pil Choi, 1996. "Preemptive R&D, Rent Dissipation, and the "Leverage Theory"," The Quarterly Journal of Economics, Oxford University Press, vol. 111(4), pages 1153-1181.
    10. Michael L. Katz & Carl Shapiro, 1994. "Systems Competition and Network Effects," Journal of Economic Perspectives, American Economic Association, vol. 8(2), pages 93-115, Spring.
    11. Bloch, Francis, 1996. "Sequential Formation of Coalitions in Games with Externalities and Fixed Payoff Division," Games and Economic Behavior, Elsevier, vol. 14(1), pages 90-123, May.
    12. Chen, Yongmin, 1997. "Equilibrium Product Bundling," The Journal of Business, University of Chicago Press, vol. 70(1), pages 85-103, January.
    13. Carmen Matutes & Pierre Regibeau, 1988. ""Mix and Match": Product Compatibility without Network Externalities," RAND Journal of Economics, The RAND Corporation, vol. 19(2), pages 221-234, Summer.
    14. 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.
    15. 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.
    16. Katz, Michael L & Shapiro, Carl, 1985. "Network Externalities, Competition, and Compatibility," American Economic Review, American Economic Association, vol. 75(3), pages 424-440, June.
    17. Joseph Farrell & Hunter K. Monroe & Garth Saloner, 1998. "The Vertical Organization of Industry: Systems Competition versus Component Competition," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 7(2), pages 143-182, June.
    18. Yi, Sang-Seung, 1997. "Stable Coalition Structures with Externalities," Games and Economic Behavior, Elsevier, vol. 20(2), pages 201-237, August.
    19. Barry Nalebuff, 2004. "Bundling as an Entry Barrier," The Quarterly Journal of Economics, Oxford University Press, vol. 119(1), pages 159-187.
    20. Stanley M. Besen & Joseph Farrell, 1994. "Choosing How to Compete: Strategies and Tactics in Standardization," Journal of Economic Perspectives, American Economic Association, vol. 8(2), pages 117-131, Spring.
    Full references (including those not matched with items on IDEAS)


    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.

    Cited by:

    1. Guillem Roig, 2017. "Product Compatibility as an Strategy to Hinder Entry Deterrence," DOCUMENTOS DE TRABAJO 015773, UNIVERSIDAD DEL ROSARIO.
    2. Zhou, Jidong, 2015. "Competitive Bundling," MPRA Paper 68358, University Library of Munich, Germany.
    3. Sang-Hyun Kim & Jong-Hee Hahn, 2017. "On the Profitability of Interfirm Bundling in Oligopolies," Working papers 2017rwp-114, Yonsei University, Yonsei Economics Research Institute.
    4. Guillem Roig, 2017. "Product Compatibility as an Strategy to Hinder Entry Deterrence," DOCUMENTOS DE TRABAJO 015774, UNIVERSIDAD DEL ROSARIO.

    More about this item

    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
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure

    NEP fields

    This paper has been announced in the following NEP Reports:


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:uea:aepppr:2012_57. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Theodore Turocy). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.