One-Way Compatibility, Two-Way Compatibility and Entry in Network Industries

Fabio Maria Manenti () and Ernesto Somma ()
Additional contact information
Ernesto Somma: Dipartimento di Scienze Economiche, Università degli Studi di Bari, Via C. Rosalba 53, 70124 BARI

No 4, series from Dipartimento di Scienze Economiche - Università di Bari

Abstract: We study the strategic choice of compatibility between two initially incompatible network goods in a two-stage game played by an incumbent and an entrant firm. Compatibility may be achieved by means of a converter. We derive a number of results under different assumptions about the nature of the converter (one-way vs two-way) and the existence of property rights. In the case of a two-way converter, which can only be supplied by the incumbent, incompatibility will result in equilibrium. When both firms can build a one-way converter and there are no property rights on the necessary technical specifications, the unique equilibrium involves full compatibility. Finally, when each firm has property rights on its technical specifications, full incompatibility and preemption are again observed at the equilibrium. With incompatibility, entry deterrence occurs for sufficiently strong network effects. The welfare analysis shows that the equilibrium compatibility regime is socially inefficient for most levels of the network effects.

Keywords: Network externalities; one-way compatibility; two-way compatibility (search for similar items in EconPapers)
JEL-codes: L13 L15 D43 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-com, nep-mic and nep-net
Note: This paper has been completed while the authors were visiting the Haas Business School and SIMS at the University of California, Berkeley. We would like to thank Hal Varian, Michael Carter, Oz Shy, Luigi Filippini and Gianluca Feminis for useful comments. Comments from seminar audiences at the 2002 conference of the Royal Economic Society, University of Warwick, at the 5th Annual Eunip conference 2001, Vienna, at the 2001 Joint EconomicWorkshop Padua-Freiburg and at the Universities of Milan (Catholic) and Catania are gratefully acknowledged.
View list of references

Downloads: (external link)
http://www.dse.uniba.it/Quaderni/SERIES/manenti-somma-series.pdf (application/pdf)

Related works:
Working Paper: One-Way Compatibility, Two-Way Compatibility and Entry in Network Industries (2002)
Working Paper: One-Way Compatibility, Two-Way Compatibility and Entry in Network Industries (2002)
Working Paper: One-Way Compatibility, Two-Way Compatibility and Entry in Network Industries (2008)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Access Statistics for this paper

More papers in series from Dipartimento di Scienze Economiche - Università di Bari
Address: Via Camillo Rosalba, 53 - 70124 - Bari ITALY
Contact information at EDIRC.
Series data maintained by Ruggiero Marco Paolillo ().