Optimal Compatibility in Systems Markets

Sang-Hyun Kim and Jay Choi

No 5037, CESifo Working Paper Series from CESifo

Abstract: We investigate private and social incentives for standardization to ensure market-wide system compatibility in a two-dimensional spatial competition model. We develop a new methodology to analyze competition on a torus and show that there is a fundamental conflict of interest between consumers and producers over the standardization decision. Consumers prefer standardization with full compatibility because it offers more variety that confers a better match with their ideal specifications. However, firms are likely to choose the minimal compatibility to maximize product differentiation and soften competition. This is in sharp contrast to the previous literature that shows the alignment of private and social incentives for compatibility.

Keywords: compatibility; system competition; standardization; spatial competition model; free entry (search for similar items in EconPapers)
JEL-codes: D43 L13 L22 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Optimal compatibility in systems markets (2015)
Working Paper: Optimal Compatibility in Systems Markets (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_5037

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