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http://ssrn.com/abstract=980726
 
 

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Compatibility and Proprietary Standards: The Impact of Conversion Technologies in IT Markets with Network Effects


Charles Z. Liu


University of Texas at San Antonio

Esther Gal-Or


University of Pittsburgh - Katz Graduate School of Business

Chris F. Kemerer


University of Pittsburgh - Katz Graduate School of Business

Michael D. Smith


Carnegie Mellon University - H. John Heinz III School of Public Policy and Management

March 1, 2011

Information Systems Research, v. 22, n. 1, pp. 188-207, March 2011

Abstract:     
In markets that exhibit network effects, the presence of digital 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 digital goods 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 (SPNE)
involves firms’ agreeing to provide digital converters at a sufficiently low price to all consumers. At this equilibrium, both the entrant and the incumbent are better off because 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.

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

JEL Classification: C70, D43, D62, L11, L13

Accepted Paper Series


Not Available For Download

Date posted: April 18, 2007 ; Last revised: August 2, 2012

Suggested Citation

Liu, Charles Z. and Gal-Or, Esther and Kemerer, Chris F. and Smith, Michael D., Compatibility and Proprietary Standards: The Impact of Conversion Technologies in IT Markets with Network Effects (March 1, 2011). Information Systems Research, v. 22, n. 1, pp. 188-207, March 2011. Available at SSRN: http://ssrn.com/abstract=980726 or http://dx.doi.org/10.2139/ssrn.980726

Contact Information

Charles Z. Liu (Contact Author)
University of Texas at San Antonio ( email )
San Antonio, TX
United States
210-458-6308 (Phone)
Esther Gal-Or
University of Pittsburgh - Katz Graduate School of Business ( email )
Pittsburgh, PA 15260
United States
Chris F. Kemerer
University of Pittsburgh - Katz Graduate School of Business ( email )
Pittsburgh, PA 15260
United States
412-648-1572 (Phone)
HOME PAGE: http://www.pitt.edu/~ckemerer/kemerer.htm
Michael D. Smith
Carnegie Mellon University - H. John Heinz III School of Public Policy and Management ( email )
Pittsburgh, PA 15213-3890
United States
HOME PAGE: http://www.heinz.cmu.edu/~mds
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