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Standards Coalitions Formation and Market Structure in Network Industries

  • Nicholas Economides

    (Stern School of Business, New York University)

  • Andrzej Skrzypacz

    (GSB, Stanford University)

We discuss the formation of technical standards platforms in industries with network externalities where firms are free to choose their degree of technical compatibility with competitors. In our model, firms choose affiliation to a technical standards coalition in the first stage of a game, and play an oligopoly game in the second stage. In adding itself to a technical standards coalition, a firm benefits from the network effects of the whole coalition, but also faces increased competition in the output market from other firms in the coalition. Also, the increase of the size of the coalition changes the competitive position of members of that coalition relative to other firms. We find that the extent and size of coalitions at equilibrium depends crucially on the degree of the intensity of network effects. When network effects are very strong, full compatibility prevails. When externalities are slightly weaker, two standards coalitions are formed, a singleton, and one with all remaining firms. On the other extreme, for very weak network effects, the equilibrium is total incompatibility, and for slightly more intense network effects, coalitions are of small size. We characterize a number of other equilibria for intermediate strengths of network externalities.

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Paper provided by EconWPA in its series Microeconomics with number 0407008.

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Length: 31 pages
Date of creation: 14 Jul 2004
Date of revision:
Handle: RePEc:wpa:wuwpmi:0407008
Note: Type of Document - pdf; pages: 31
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  1. 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.
  2. Chatterjee, Kalyan & Bhaskar Dutta & Debraj Ray & Kunal Sengupta, 1993. "A Noncooperative Theory of Coalitional Bargaining," Review of Economic Studies, Wiley Blackwell, vol. 60(2), pages 463-77, April.
  3. Ray, Debraj & Vohra, Rajiv, 1997. "Equilibrium Binding Agreements," Journal of Economic Theory, Elsevier, vol. 73(1), pages 30-78, March.
  4. Rubinstein, Ariel, 1982. "Perfect Equilibrium in a Bargaining Model," Econometrica, Econometric Society, vol. 50(1), pages 97-109, January.
  5. Ray, Debraj & Vohra, Rajiv, 1999. "A Theory of Endogenous Coalition Structures," Games and Economic Behavior, Elsevier, vol. 26(2), pages 286-336, January.
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