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Equilibrium Coalition Structures in Markets for Network Goods

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  • Nocholas Economides
  • Frederick Flyer

Abstract

Firms that produce network goods have strong incentives to adhere to common technical standards. However, adhering to common standards decreases the horizontal differentiation between goods, and that increases market competition. This paper analyzes how these countervailing forces shape firms' decisions to comply to common technical standards under oligopoly. In the model, firms' outputs are identical in non-network characteristics, but firms can adhere to different compatibility standards. Consequently, a good's relative quality level is determined by the total sales of compatible goods. The technical standards coalition structures that form at equilibrium under this framework exhibit interesting characteristics. In particular, coalitions that vary greatly in total sales, profits, and prices often emerge, even though underlying products and cost structures are identical across firms.

Suggested Citation

  • Nocholas Economides & Frederick Flyer, 1998. "Equilibrium Coalition Structures in Markets for Network Goods," Annals of Economics and Statistics, GENES, issue 49-50, pages 361-380.
    • Handle: RePEc:adr:anecst:y:1998:i:49-50:p:361-380
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    Cited by:

    1. van Wegberg, M.J., 2003. "A note on network structure: functional relationships between network indicators," Research Memorandum 032, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
    2. Ghazzai Hend & Lahmandi-Ayed Rim, 2009. "Vertical Differentiation, Social Networks and Compatibility Decisions," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 9(1), pages 1-23, June.
    3. repec:ebl:ecbull:v:12:y:2004:i:1:p:1-9 is not listed on IDEAS
    4. van Wegberg, Marc, 2004. "Compatibility choice by multi-market firms," Information Economics and Policy, Elsevier, vol. 16(2), pages 235-254, June.
    5. Nicolas Jonard & Eric Schenk, 2004. "A note on compatibility and entry in a circular model of product differentiation," Economics Bulletin, AccessEcon, vol. 12(1), pages 1-9.
    6. Hend Ghazzai & Rim Lahmandi-Ayed, 2006. "Vertical differentiation, network externalities and compatibility decisions: an alternative approach," Cahiers de la Maison des Sciences Economiques b06013, Université Panthéon-Sorbonne (Paris 1).
    7. van Wegberg, M.J., 2003. "The grand coalition versus competing coalitions: trade-offs in how to standardize," Research Memorandum 021, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).

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