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Compatibility, Intellectual Property, Innovation and Efficiency in Durable Goods Markets with Network Effects

  • Athanasopoulos, Thanos

    (Department of Economics, University of Warwick)

This paper analyses firms’ behaviour towards compatibility and the relation of these decisions with their incentives to invest into improving their durable, network goods. By using a sequential game where the dominant firm plays first, we give its competitor the ability to build on innovations previously introduced by the market leader. Recognizing the intertemporal linkage in forward looking customers’purchasing choices, we find that in anticipation of a relatively large quality improvement by the rival, strategic pricing leads the dominant firm to support compatibility even if it could exclude its rivals by using a patent for its invention. Furthermore, not only doesn’t interoperability de-facto maximise social welfare but we also identify no market failure when network effects are not particularly strong. JEL classification: D43 ; L13 ; D71 ; D62 ; L15 ; L4 ; K21 ; L51 ; O34 ; O31

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Paper provided by University of Warwick, Department of Economics in its series The Warwick Economics Research Paper Series (TWERPS) with number 1043.

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Date of creation: 2014
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Handle: RePEc:wrk:warwec:1043
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  1. Luis Cabral & David Salant, 2008. "Evolving Technologies and Standards Regulation," Working Papers 08-16, New York University, Leonard N. Stern School of Business, Department of Economics.
  2. Suzanne Scotchmer, 1996. "Protecting Early Innovators: Should Second-Generation Products Be Patentable?," RAND Journal of Economics, The RAND Corporation, vol. 27(2), pages 322-331, Summer.
  3. Jean-Jacques Laffont & Patrick Rey & Jean Tirole, 1998. "Network Competition: I. Overview and Nondiscriminatory Pricing," RAND Journal of Economics, The RAND Corporation, vol. 29(1), pages 1-37, Spring.
  4. Doganoglu, Toker & Wright, Julian, 2006. "Multihoming and compatibility," International Journal of Industrial Organization, Elsevier, vol. 24(1), pages 45-67, January.
  5. Economides, Nicholas & White, Lawrence J., 1994. "Networks and compatibility: Implications for antitrust," European Economic Review, Elsevier, vol. 38(3-4), pages 651-662, April.
  6. Nicholas Economides, 1997. "The Economics of Networks," Brazilian Electronic Journal of Economics, Department of Economics, Universidade Federal de Pernambuco, vol. 1(0), December.
  7. Suzanne Scotchmer, 1991. "Standing on the Shoulders of Giants: Cumulative Research and the Patent Law," Journal of Economic Perspectives, American Economic Association, vol. 5(1), pages 29-41, Winter.
  8. Jiawei Chen & Ulrich Doraszelski & Joseph E. Harrington, Jr., 2008. "Avoiding Market Dominance: Product Compatibility in Markets with Network Effects," Economics Working Paper Archive 537, The Johns Hopkins University,Department of Economics.
  9. Michael Carter & Julian Wright, 2003. "Asymmetric Network Interconnection," Review of Industrial Organization, Springer, vol. 22(1), pages 27-46, February.
  10. James Bessen & Eric Maskin, 2009. "Sequential innovation, patents, and imitation," RAND Journal of Economics, RAND Corporation, vol. 40(4), pages 611-635.
  11. Joseph Farrell & Garth Saloner, 1984. "Standardization, Compatibility and Innovation," Working papers 345, Massachusetts Institute of Technology (MIT), Department of Economics.
  12. Katz, Michael L & Shapiro, Carl, 1985. "Network Externalities, Competition, and Compatibility," American Economic Review, American Economic Association, vol. 75(3), pages 424-40, June.
  13. Cremer, Jacques & Rey, Patrick & Tirole, Jean, 2000. "Connectivity in the Commercial Internet," Journal of Industrial Economics, Wiley Blackwell, vol. 48(4), pages 433-72, December.
  14. David A. Malueg & Marius Schwartz, 2006. "COMPATIBILITY INCENTIVES OF A LARGE NETWORK FACING MULTIPLE RIVALS -super-* ," Journal of Industrial Economics, Wiley Blackwell, vol. 54(4), pages 527-567, December.
  15. Church, J. & Gandal, N., 1996. "Systems Competition, Vertical Merger and Foreclosure," Papers 6-96, Tel Aviv - the Sackler Institute of Economic Studies.
  16. María Fernanda Viecens, 2009. "Compatibility with Firm Dominance," Working Papers 2009-12, FEDEA.
  17. Glenn Ellison & Drew Fudenberg, 1999. "The Neo-Luddite's Lament: Excessive Upgrades in the Software Industry," Harvard Institute of Economic Research Working Papers 1870, Harvard - Institute of Economic Research.
  18. Michael Manove & Gerard Llobet, 2004. "Sequential Innovation, Network Effects and the Choice of Compatibility," 2004 Meeting Papers 721, Society for Economic Dynamics.
  19. Nicholas Economides, 2006. "Public Policy in Network Industries," Working Papers 06-17, New York University, Leonard N. Stern School of Business, Department of Economics.
  20. Athanasopoulos, Thanos, 2013. "Efficient Upgrading in Network Goods : Is Commitment Always Good?," The Warwick Economics Research Paper Series (TWERPS) 1006, University of Warwick, Department of Economics.
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