COMPATIBILITY STRATEGIES FOR AN ASYMMETRIC DUOPOLY CONSIDERING NETWORK EFFECTS AND MARKET SHARES

Fan-Chen Tseng () and Kuang-Cheng Andy Wang ()
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Fan-Chen Tseng: Department of Information and Electronic Commerce, Kainan University, No. 1, Kainan Road, Luzhu Shiang, Taoyuan 33857, Taiwan, R.O.C
Kuang-Cheng Andy Wang: Social Science Division, Center for General Education, Chang Gung University, 259, Wenhua 1st Rd, Gueishan Shiang, Taoyuan 333, Taiwan, R.O.C

International Journal of Innovation and Technology Management (IJITM), 2011, vol. 08, issue 04, 615-634

Abstract: The network effect is a key factor influencing the development of e-business and technological innovation. At the same time, compatibility decisions can determine the success or failure of businesses and technologies. This study explores the compatibility strategies in the context of network effects using a two-stage game-theoretical model for a duopoly. In the first stage, two firms make their compatibility decisions, and in the second stage, two firms are engaged in Bertrand price competition. Major findings are (1) other things being fixed, two firms are more likely to be compatible with each other when they have similar market shares, (2) the compatibility decisions of firms will not be influenced by consumers' switching costs, (3) the order of their compatibility decisions will not change the resulting equilibrium, and (4) based on firms' compatibility decisions, the Bertrand price competition may still lead to market failure, necessitating governmental intervention or regulations.

Keywords: Compatibility; network effect; switching cost; undercut-proof equilibrium (search for similar items in EconPapers)
Date: 2011
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DOI: 10.1142/S0219877011002581

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