Optimal Compatibility in Systems Markets

Sang-Hyun Kim and Jay Choi

No 57, University of East Anglia Applied and Financial Economics Working Paper Series from School of Economics, University of East Anglia, Norwich, UK.

Abstract: We analyze private and social incentives for standardization to ensure market-wide system compatibility in a two-dimensional spatial competition model. It is shown 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 better match with their ideal specifications. However, firms are likely to choose the minimum 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. We also characterize the free-entry equilibria under the maximum and the minimum compatibility. With free entry, more firms enter without standardization, but the number of available system variety is less than the one under standardization.

Date: 2014-02
New Economics Papers: this item is included in nep-com, nep-mic and nep-net
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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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