Optimal Compatibility in Systems Markets

29 Pages Posted: 5 Nov 2014

See all articles by Sang-Hyun Kim

Sang-Hyun Kim

University of East Anglia (UEA)

Jay Pil Choi

Michigan State University - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: October 24, 2014

Abstract

We investigate private and social incentives for standardization to ensure market-wide system compatibility in a two-dimensional spatial competition model. We develop a new methodology to analyze competition on a torus and show that there is a fundamental conflict of interest between consumers and producers over the standardization decision. Consumers prefer standardization with full compatibility because it offers more variety that confers a better match with their ideal specifications. However, firms are likely to choose the minimal compatibility to maximize product differentiation and soften competition. This is in sharp contrast to the previous literature that shows the alignment of private and social incentives for compatibility.

Keywords: compatibility, system competition, standardization, spatial competition model, free entry

JEL Classification: D430, L130, L220

Suggested Citation

Kim, Sang-Hyun and Choi, Jay Pil, Optimal Compatibility in Systems Markets (October 24, 2014). CESifo Working Paper Series No. 5037, Available at SSRN: https://ssrn.com/abstract=2519434

Sang-Hyun Kim

University of East Anglia (UEA) ( email )

Norwich Research Park
Norwich, Norfolk NR4 7TJ
United Kingdom

Jay Pil Choi (Contact Author)

Michigan State University - Department of Economics ( email )

101 Marshall Hall
East Lansing, MI 48824
United States
517-353-7281 (Phone)

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
25
Abstract Views
370
PlumX Metrics