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Product Compatibility and Technological Innovation

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  • Jeong-Yoo Kim

Abstract

This paper explores the relationship between the firms' compatibility choice and quality improving technological progress in a static model. I demonstrate that firms' compatibility choice in anticipation of quality improving innovation critically depends on how users' expectations regarding the network size are formed. In particular, if users have rational expectations the firm with the small innovation will prefer full compatibility whereas the firm with the large innovation will prefer complete incompatibility,, and as a result, with the small innovation, excessive standardization may occur. [D13]

Suggested Citation

  • Jeong-Yoo Kim, 2000. "Product Compatibility and Technological Innovation," International Economic Journal, Taylor & Francis Journals, vol. 14(3), pages 87-100.
    • Handle: RePEc:taf:intecj:v:14:y:2000:i:3:p:87-100
    DOI: 10.1080/10168730000000030
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    1. Farrell, Joseph & Saloner, Garth, 1992. "Converters, Compatibility, and the Control of Interfaces," Journal of Industrial Economics, Wiley Blackwell, vol. 40(1), pages 9-35, March.
    2. De Bijl, Paul W. J. & Goyal, Sanjeev, 1995. "Technological change in markets with network externalities," International Journal of Industrial Organization, Elsevier, vol. 13(3), pages 307-325, September.
    3. Farrell, Joseph, 1986. "A note on inertia in market share," Economics Letters, Elsevier, vol. 21(1), pages 73-75.
    4. Katz, Michael L & Shapiro, Carl, 1986. "Product Compatibility Choice in a Market with Technological Progress," Oxford Economic Papers, Oxford University Press, vol. 38(0), pages 146-165, Suppl. No.
    5. 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.
    6. Katz, Michael L & Shapiro, Carl, 1985. "Network Externalities, Competition, and Compatibility," American Economic Review, American Economic Association, vol. 75(3), pages 424-440, June.
    7. Michael L. Katz & Carl Shapiro, 1994. "Systems Competition and Network Effects," Journal of Economic Perspectives, American Economic Association, vol. 8(2), pages 93-115, Spring.
    8. Michael Kurth, 1985. "Review," Public Choice, Springer, vol. 45(2), pages 223-224, January.
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    Cited by:

    1. Tsuyoshi Toshimitsu, 2023. "The Impact of Compatibility on Incentives to Innovate in a Network Goods Market: A Duopoly Case," Discussion Paper Series 253, School of Economics, Kwansei Gakuin University.
    2. John S. Heywood & Zerong Wang & Guangliang Ye, 2022. "R&D rivalry with endogenous compatibility," Manchester School, University of Manchester, vol. 90(3), pages 354-384, June.

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