Strategic product compatibility in network industries

Domenico Buccella, Luciano Fanti and Luca Gori ()

Journal of Economics, 2023, vol. 140, issue 2, No 3, 168 pages

Abstract: Abstract This article considers a product’s compatibility as a strategic variable in a Cournot duopoly with network consumption externalities. It develops a non-cooperative compatibility decision game (CDG) in which firms choose whether to let products be (in)compatible. With costless compatibility, the unique (Pareto-efficient) sub-game perfect Nash equilibrium (SPNE) of the CDG is universal compatibility. With quasi-fixed compatibility costs, the SPNE depends on whether product compatibility is an endogenous (i.e., a profit-maximising) or exogenous (i.e., given by technical constraints) variable. In the case of endogenous compatibility, the SPNE can vary from one unique to multiple regimes of (in)compatibility, such as the anti-prisoner’s dilemma (deadlock), prisoner’s dilemma, and coordination game. In the case of exogenous compatibility, the SPNE can become an anti-coordination game as well. The article also discusses the welfare outcomes corresponding to the SPNE.

Keywords: Network externality; Product compatibility; Cournot duopoly; Quasi-fixed costs (search for similar items in EconPapers)
JEL-codes: D4 L1 L3 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:kap:jeczfn:v:140:y:2023:i:2:d:10.1007_s00712-023-00834-x

DOI: 10.1007/s00712-023-00834-x

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