Dynamics of Compatibility under Switching Costs

Doh-Shin Jeon, Domenico Menicucci and Nikrooz Nasr ()
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Nikrooz Nasr: Toulouse School of Economics, 21 allees de Brienne, 31000 Toulouse, France

No 15-17, Working Papers from NET Institute

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, 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 (search for similar items in EconPapers)
JEL-codes: D43 L13 L41 (search for similar items in EconPapers)
Pages: 46 pages
Date: 2015-04, Revised 2015-10
New Economics Papers: this item is included in nep-bec, nep-com and nep-mkt
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