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Partial compatibility in oligopoly

Author

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  • Innocenti, Federico
  • Menicucci, Domenico

Abstract

This paper examines the issue of product compatibility in an oligopoly with three multi-product firms. Whereas most of the existing literature focuses on the extreme cases of full compatibility or full incompatibility, we look at asymmetric settings in which some firms make their products compatible with a standard technology and others do not. Our analysis reveals each firm’s individual incentive to adopt the standard, and allows to study a two-stage game in which first each firm chooses its technological regime (compatibility or incompatibility), then price competition occurs given the regime each firm has selected at stage one. When firms are ex ante symmetric, we find that for each firm compatibility weakly dominates incompatibility. In a setting in which a firm’s products have higher quality than its rivals’ products, individual incentives to make products incompatible emerge, first for the firm with higher quality products, then also for the other firms, as the quality difference increases. This paper sheds lights on markets in which some firms adopt the standard technology but other firms use proprietary systems.

Suggested Citation

  • Innocenti, Federico & Menicucci, Domenico, 2021. "Partial compatibility in oligopoly," Journal of Economic Behavior & Organization, Elsevier, vol. 188(C), pages 351-378.
    • Handle: RePEc:eee:jeborg:v:188:y:2021:i:c:p:351-378
    DOI: 10.1016/j.jebo.2021.05.005
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    Cited by:

    1. Ding, Rong & Ko, Chiu Yu & Shen, Bo, 2022. "Partial compatibility in two-sided markets: Equilibrium and welfare analysis," Economic Modelling, Elsevier, vol. 116(C).
    2. Innocenti, Federico & Menicucci, Domenico, 2021. "Partial compatibility in oligopoly," Journal of Economic Behavior & Organization, Elsevier, vol. 188(C), pages 351-378.

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    More about this item

    Keywords

    Compatibility; Spatial competition; Vertical differentiation; Asymmetric equilibrium; Competitive bundling;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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