One-Way Compatibility, Two-Way Compatibility and Entry in Network Industries
30 Pages Posted: 20 Nov 2003 Last revised: 21 Mar 2008
There are 2 versions of this paper
One-Way Compatibility, Two-Way Compatibility and Entry in Network Industries
One-Way Compatibility, Two-Way Compatibility and Entry in Network Industries
Date Written: February 1, 2008
Abstract
We study the strategic choice of compatibility between two initially incompatible network goods in a two-stage game played by an incumbent and an entrant firm. Compatibility may be achieved by means of a converter. We derive a number of results under different assumptions about the nature of the converter (one-way vs two-way), the existence of property rights and the possibility of side payments. With incompatibility, entry deterrence occurs for sufficiently strong network effects. In the case of a two-way converter, which can only be supplied by the incumbent, incompatibility will result in equilibrium unless side payments are allowed and the network externalities are sufficiently low. When both firms can build a one-way converter and there are no property rights on the necessary technical specifications, the unique equilibrium involves full compatibility. Finally, when each firm has property rights on its technical specifications, full incompatibility is observed at the equilibrium with no side payments; when these are allowed the entrant sells access to its network to the incumbent which refuses to do the same and asymmetric one-way compatibility results in equilibrium. The welfare analysis shows that the equilibrium compatibility regime is socially inefficient for most levels of the network effects.
Keywords: network externalities, one-way compatibility, two-way compatibility, entry, invitations to enter
JEL Classification: L13, L15, D43
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Coordination and Lock-In: Competition with Switching Costs and Network Effects
By Joseph Farrell and Paul Klemperer
-
Coordination and Lock-In: Competition with Switching Costs and Network Effects
By Joseph Farrell and Paul Klemperer
-
Do Firms' Product Lines Include Too Many Varieties?
By Paul Klemperer and Jorge Padilla
-
Regulating Endogenous Customer Switching Costs
By Joshua S. Gans and Stephen P. King
-
Compatibility Incentives of a Large Network Facing Multiple Rivals
By David A. Malueg and Marius Schwartz
-
Numbers to the People: Regulation, Ownership and Local Number Portability
By Joshua S. Gans, Stephen P. King, ...