Equilibrium Coalition Structures in Markets for Network Goods

Nicholas Economides () and Frederick Flyer

Annals of Economics and Statistics, 1998, issue 49-50, 361-380

Abstract: Firms that produce network goods have strong incentives to adhere to common technical standards. However, adhering to common standards decreases the horizontal differentiation between goods, and that increases market competition. This paper analyzes how these countervailing forces shape firms' decisions to comply to common technical standards under oligopoly. In the model, firms' outputs are identical in non-network characteristics, but firms can adhere to different compatibility standards. Consequently, a good's relative quality level is determined by the total sales of compatible goods. The technical standards coalition structures that form at equilibrium under this framework exhibit interesting characteristics. In particular, coalitions that vary greatly in total sales, profits, and prices often emerge, even though underlying products and cost structures are identical across firms.

Date: 1998
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