Installed Base and Compatibility: Innovation, Product Preannouncements, and Predation

Joseph Farrell () and Garth Saloner

American Economic Review, 1986, vol. 76, issue 5, 940-55

Abstract: A good is often more valuable to any user, the more others use compatible goods. The authors show that this effect may inhibit innovation. If an installed base exists and transition to a new standard must be gradual, early adopters bear a disproportionate share of transient incompatibility costs. This can produce "excess inertia." The installed base, however, is "stranded" if the new standard is adopted: this may create "excess momentum." These dynamic effects have strategic implications. Temporary price cutting can permanently prevent entry; and product preannouncements can be critical in innovation. These strategic actions have ambiguous welfare effects.

Date: 1986
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