Dynamics of Compatibility Under Switching Costs

47 Pages Posted: 22 Oct 2015

See all articles by Doh-Shin Jeon

Doh-Shin Jeon

Toulouse School of Economics (TSE); Centre for Economic Policy Research (CEPR)

Domenico Menicucci

Universita' degli Studi di Firenze

Nikrooz Nasr Esfahani

Toulouse School of Economics (TSE)

Date Written: October 1, 2015

Abstract

We study firms' choices of compatibility in a dynamic setting. Current compatibility choice shapes the distribution of consumers switching costs and thereby affects competition and compatibility choice in the future. Given today's market shares, the dynamics of compatibility is asymmetric in that firms are more likely to embrace compatibility tomorrow if products are compatible today but no such inertia exists for incompatibility. However, this asymmetry disappears when the market shares are endogenous. Contrary to what happens in a static setting (Matutes and R├ęgibeau, 1988), when consumer lock-in arises due to a significant switching cost, firms make their systems incompatible in order to soften future competition, which hurts consumers and tends to reduce welfare.

Keywords: (In)Compatibility, Dynamics, Lock-in, Switching Cost

JEL Classification: D43, L13, L41

Suggested Citation

Jeon, Doh-Shin and Menicucci, Domenico and Nasr Esfahani, Nikrooz, Dynamics of Compatibility Under Switching Costs (October 1, 2015). NET Institute Working Paper No. 15-17, Available at SSRN: https://ssrn.com/abstract=2675549 or http://dx.doi.org/10.2139/ssrn.2675549

Doh-Shin Jeon (Contact Author)

Toulouse School of Economics (TSE) ( email )

Place Anatole-France
Toulouse Cedex, F-31042
France

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Domenico Menicucci

Universita' degli Studi di Firenze ( email )

via delle pandette 9
Firenze, 50127
Italy
+39-055-4374666 (Phone)
+39-055-4374913 (Fax)

HOME PAGE: http://www.dmd.unifi.it/index.php?loc=personal&id=d.menicucci

Nikrooz Nasr Esfahani

Toulouse School of Economics (TSE) ( email )

Place Anatole-France
Toulouse Cedex, F-31042
France

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

Paper statistics

Downloads
46
Abstract Views
431
PlumX Metrics