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Abstract:
Contemporary users choosing a technology platform often run the risk of being stranded with a technology that becomes incompatible with a future dominant technology. The widely observed presence of network effects tends to exacerbate this consumer dilemma, as markets tend to "tip" towards a single, winner-take-all standard. This study seeks to show that such a dilemma can be solved in some circumstances for digital goods when conversion technologies are present.

The results from a duopoly model confirm that the existence of a converter can mediate the network effects of the pre-existing installed base. The conversion equilibrium is found to be more sustainable the higher the quality of conversion and the lower the conversion cost. Interestingly, both the entrant and the incumbent are shown to be better off by supplying a high quality converter. These findings have important implications for research and practice in adoption of new digital goods as the introduction of conversion technologies can reduce the social costs of standardization without compromising the benefits of network effects.

Network Effects, Conversion Technologies, Compatibility, Technology Standards, Digital Goods, Network Externalities

Abstract:
In markets that exhibit network effects, the presence of conversion technologies provides an alternative mechanism to achieve compatibility. This study examines the impact of conversion technologies on market equilibrium in the context of sequential duopoly competition and proprietary technology standards.

We analyze this question by departing from the extant literature to endogenize the decision to provide a converter and incorporate explicit negotiations between firms concerning the extent of conversion. We argue that these choices better reflect the environment facing firms in IT-industries and find that these decisions change some of the established results in the literature.

Specifically, we find that unless network effects are very large, the subgame perfect equilibrium involves firms' agreeing on providing converters at a sufficiently low price to all consumers. At this equilibrium, both the entrant and the incumbent are better off since the provision of converters alleviates price competition in the market and leads to both higher product revenues and higher proceeds from the sale of converters. Moreover, under some circumstances the provision of converters is welfare enhancing. These findings have important implications for research and practice in the adoption of new digital goods as the introduction of conversion technologies can reduce the social costs of standardization without compromising the benefits of network effects.

Network effects, standards competition, conversion technologies, flash memory, digital goods

Abstract:
In markets that exhibit network effects, the presence of conversion technologies provides an alternative mechanism to achieve compatibility. This study examines the impact of conversion technologies on market equilibrium in the context of sequential duopoly competition and proprietary technology standards.

We analyze this question by departing from the extant literature to endogenize the decision to provide a converter and incorporate explicit negotiations between firms concerning the extent of conversion. We argue that these choices better reflect the environment facing firms in IT-industries and find that these decisions change some of the established results in the literature.

Specifically, we find that unless network effects are very large, the subgame perfect equilibrium involves firms' agreeing on providing converters at a sufficiently low price to all consumers. At this equilibrium, both the entrant and the incumbent are better off since the provision of converters alleviates price competition in the market and leads to both higher product revenues and higher proceeds from the sale of converters. Moreover, under some circumstances the provision of converters is welfare enhancing.

These findings have important implications for research and practice in the adoption of new digital goods as the introduction of conversion technologies can reduce the social costs of standardization without compromising the benefits of network effects.

Network Effects, Network Externalities, Conversion Technologies, Compatibility, Technology Standards, Digital Goods