Dynamics of Compatibility Under Switching Costs
47 Pages Posted: 22 Oct 2015
Date Written: October 1, 2015
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 Régibeau, 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: Suggested Citation