Pricing and Compatibility in Network Goods Markets

39 Pages Posted: 30 Aug 2018 Last revised: 10 May 2021

See all articles by Thanos Athanasopoulos

Thanos Athanasopoulos

University College London - Department of Economics

Date Written: December 17, 2020

Abstract

I examine an incumbent monopolist's pricing strategy in a two-period durable goods market for complements with network effects, such as the Operating System and software applications, and its compatibility stance with a future competitor when the market for applications is characterised by quality growth. Consumers arrive in the market in the first period and the “threat” to exercise their option to postpone their purchase may lead the incumbent to charge a price for its Operating System lower than that of a static monopolist no matter what the compatibility regime. I also show that the incumbent may support compatibility regardless of the presence of switching costs. The welfare effects of mandatory compatibility are ambiguous.

Keywords: Pricing; Compatibility; Innovation; Network Effects; Intertemporal Choice; Expectations; Collective Decision-Making; Antitrust Law

JEL Classification: D4; L15; D62; K21

Suggested Citation

Athanasopoulos, Thanos, Pricing and Compatibility in Network Goods Markets (December 17, 2020). Available at SSRN: https://ssrn.com/abstract=3235943 or http://dx.doi.org/10.2139/ssrn.3235943

Thanos Athanasopoulos (Contact Author)

University College London - Department of Economics ( email )

Drayton House, 30 Gordon Street
30 Gordon Street
London, WC1H 0AX
United Kingdom

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