Compatibility Decisions, Endogenous Installed Home Bases and the Third-Market Competition

Uwe Walz and Bernd Woeckener

No 3816, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: This Paper analyses the compatibility decisions of two regional monopolistic suppliers of a network-effect good who first build up installed bases in their respective home region and then compete in a third market. We show that with weak network effects, installed home bases always are higher under compatibility and suppliers always opt for compatibility. With strong network effects, home markets are covered, and given a sufficiently high home-market size advantage both the favoured supplier and a regional standardization body maintain incompatibility in order (to enable the supplier) to monopolize the third market via limit pricing. As incompatibility always results in a welfare loss, this is a strong case for a global standardization body.

Keywords: Compatibility decisions; Installed home base; International network effects; Third-market competition; Standardization bodies (search for similar items in EconPapers)
JEL-codes: F12 L15 (search for similar items in EconPapers)
Date: 2003-03
New Economics Papers: this item is included in nep-geo and nep-net
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