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

Fabio Maria Manenti () and Ernesto Somma

Industrial Organization from EconWPA

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 \emph{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; entry (search for similar items in EconPapers)
JEL-codes: L13 L15 D43 (search for similar items in EconPapers)
Date: 2002-05-06, Revised 2002-10-04
Note: Type of Document - Acrobat PDF; prepared on PC; to print on PostScript; pages: 25 . document generated with latex
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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
Working Paper: One-Way Compatibility, Two-Way Compatibility and Entry in Network Industries (2008)
Journal Article: One-Way Compatibility, Two-Way Compatibility and Entry in Network Industries (2008)
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Persistent link: http://EconPapers.repec.org/RePEc:wpa:wuwpio:0205001

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