Revealing incentives for Compatibility Provision in Vertically differentiated Network Industries

Filomena Garcia and Cecilia Vergari ()

No 2015-005, CAEPR Working Papers from Center for Applied Economics and Policy Research, Department of Economics, Indiana University Bloomington

Abstract: Abstract: We determine the incentives for compatibility provision of firms that produce network goods with different intrinsic qualities. We consider the case in which both firms have the power to veto compatibility and the case in which none has this power. We obtain that if consumers have a strong preference for the network, there are multiple equilibria in pricing and consumer decisions. We show that in some equilibria, it is the high quality firm that invests in compatibility, whereas in others, the low quality fi rm triggers compatibility. The socially optimal compatibility level is zero, except under strong network effects, where one of the equilibria has all consumers buying the low quality good. In this case, a partial level of compatibility is optimal. Comparison between the privately and the socially optimal levels of compatibility depends on whether or not rms have veto power over compatibility.

Keywords: Compatibility; vertical (search for similar items in EconPapers)
JEL-codes: L13 L15 (search for similar items in EconPapers)
Pages: 55 pages
Date: 2015-05
New Economics Papers: this item is included in nep-com, nep-cta, nep-ind, nep-net and nep-reg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Journal Article: Revealing Incentives for Compatibility Provision in Vertically Differentiated Network Industries (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:inu:caeprp:2015005

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