Partial compatibility in oligopoly

Federico Innocenti and Domenico Menicucci

Journal of Economic Behavior & Organization, 2021, vol. 188, issue C, 351-378

Abstract: This paper examines the issue of product compatibility in an oligopoly with three multi-product firms. Whereas most of the existing literature focuses on the extreme cases of full compatibility or full incompatibility, we look at asymmetric settings in which some firms make their products compatible with a standard technology and others do not. Our analysis reveals each firm’s individual incentive to adopt the standard, and allows to study a two-stage game in which first each firm chooses its technological regime (compatibility or incompatibility), then price competition occurs given the regime each firm has selected at stage one. When firms are ex ante symmetric, we find that for each firm compatibility weakly dominates incompatibility. In a setting in which a firm’s products have higher quality than its rivals’ products, individual incentives to make products incompatible emerge, first for the firm with higher quality products, then also for the other firms, as the quality difference increases. This paper sheds lights on markets in which some firms adopt the standard technology but other firms use proprietary systems.

Keywords: Compatibility; Spatial competition; Vertical differentiation; Asymmetric equilibrium; Competitive bundling (search for similar items in EconPapers)
JEL-codes: D43 L13 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Working Paper: Partial Compatibility in Oligopoly (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jeborg:v:188:y:2021:i:c:p:351-378

DOI: 10.1016/j.jebo.2021.05.005

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