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Partial Compatibility and Vertical Differentiation

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  • Chung-Hui Chou

    (I-Shou University)

Abstract

In this paper we construct a game-theoretic model to analyze firms¡¦ partial compatibility choices. The quality of a hybrid system depends on the minimum of the compatibility levels chosen by firms. We find that, depending on the investment cost, the compatibility level could be incompatibility or partial compatibility. When the investment cost is very small, firms¡¦ optimal compatibility levels are partial. If the investment cost is relatively large, then firms will choose incompatibility. These results offer an explanation for why firms do not produce components which are fully compatible with their rivals¡¦.

Suggested Citation

  • Chung-Hui Chou, 2007. "Partial Compatibility and Vertical Differentiation," Economics Bulletin, AccessEcon, vol. 12(21), pages 1-8.
    • Handle: RePEc:ebl:ecbull:eb-07l10020
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    File URL: http://www.accessecon.com/pubs/EB/2007/Volume12/EB-07L10020A.pdf
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    References listed on IDEAS

    as
    1. Economides, Nicholas, 1999. "Quality choice and vertical integration," International Journal of Industrial Organization, Elsevier, vol. 17(6), pages 903-914, August.
    2. Chou, Chien-fu & Shy, Oz, 1990. "Network effects without network externalities," International Journal of Industrial Organization, Elsevier, vol. 8(2), pages 259-270, June.
    3. de Palma, Andre & Leruth, Luc & Regibeau, Pierre, 1999. "Partial compatibility with network externalities and double purchase," Information Economics and Policy, Elsevier, vol. 11(2), pages 209-227, July.
    4. Economides, Nicholas, 1989. "Desirability of Compatibility in the Absence of Network Externalities," American Economic Review, American Economic Association, vol. 79(5), pages 1165-1181, December.
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    6. Chou, Chien-fu & Shy, Oz, 1993. "Partial compatibility and supporting services," Economics Letters, Elsevier, vol. 41(2), pages 193-197.
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    Cited by:

    1. Chung-Hui Chou, 2020. "Do Consumers Gain or Lose when Network Externalities Become Stronger?," Economics Bulletin, AccessEcon, vol. 40(3), pages 2193-2200.

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    More about this item

    JEL classification:

    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance

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