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Optimal Compatibility in Systems Markets

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  • Sang-Hyun Kim
  • Jay Pil Choi

Abstract

We investigate private and social incentives for standardization to ensure market-wide system compatibility in a two-dimensional spatial competition model. We develop a new methodology to analyze competition on a torus and show 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 a better match with their ideal specifications. However, firms are likely to choose the minimal 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.

Suggested Citation

  • Sang-Hyun Kim & Jay Pil Choi, 2014. "Optimal Compatibility in Systems Markets," CESifo Working Paper Series 5037, CESifo.
    • Handle: RePEc:ces:ceswps:_5037
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Guillem Roig, 2020. "Product Compatibility Hinders Pre‐Emptive Advertising," Economic Inquiry, Western Economic Association International, vol. 58(4), pages 1663-1688, October.
    2. Sang‐Hyun Kim & Jong‐Hee Hahn, 2022. "On the profitability of interfirm bundling in oligopolies," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 31(3), pages 657-673, August.
    3. Jeon, Doh-Shin & Menicucci, Domenico & Nasr, Nikrooz, 2016. "Compatibility Choices, Switching Costs and Data Portability: On the Role of the Non-Negative Pricing Constraint," TSE Working Papers 16-691, Toulouse School of Economics (TSE), revised Aug 2020.
    4. Innocenti, Federico & Menicucci, Domenico, 2021. "Partial compatibility in oligopoly," Journal of Economic Behavior & Organization, Elsevier, vol. 188(C), pages 351-378.
    5. Jidong Zhou, 2017. "Competitive Bundling," Econometrica, Econometric Society, vol. 85, pages 145-172, January.
    6. Domenico Buccella & Luciano Fanti & Luca Gori, 2023. "Strategic product compatibility in network industries," Journal of Economics, Springer, vol. 140(2), pages 141-168, October.
    7. Manfred Stadler & Céline Tobler Trexler & Maximiliane Unsorg, 2022. "The Perpetual Trouble with Network Products Why IT Firms Choose Partial Compatibility," Networks and Spatial Economics, Springer, vol. 22(4), pages 903-913, December.
    8. Ron Adner & Jianqing Chen & Feng Zhu, 2020. "Frenemies in Platform Markets: Heterogeneous Profit Foci as Drivers of Compatibility Decisions," Management Science, INFORMS, vol. 66(6), pages 2432-2451, June.
    9. Buccella Domenico & Fanti Luciano & Gori Luca, 2024. "Product Quality and Product Compatibility in Network Industries," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 24(1), pages 299-339, January.
    10. Shuai, Jie & Yang, Huanxing & Zhang, Lan, 2022. "Dominant firm and competitive bundling in oligopoly markets," Games and Economic Behavior, Elsevier, vol. 132(C), pages 421-447.
    11. Guillem Roig, 2017. "Product Compatibility as an Strategy to Hinder Entry Deterrence," Documentos de Trabajo 15774, Universidad del Rosario.
    12. Zhou, Jidong, 2021. "Mixed bundling in oligopoly markets," Journal of Economic Theory, Elsevier, vol. 194(C).
    13. Jeon, Doh-Shin & Hurkens, Sjaak & Menicucci, Domenico, 2016. "Leveraging Dominance with Credible Bundling," CEPR Discussion Papers 11304, C.E.P.R. Discussion Papers.
    14. Liu, He & Amit, Raphael & Qiao, Han & Wang, Shouyang, 2024. "Digital platform compatibility strategies in platform co-opetition," Journal of Business Research, Elsevier, vol. 174(C).
    15. Ding, Rong & Ko, Chiu Yu & Shen, Bo, 2022. "Partial compatibility in two-sided markets: Equilibrium and welfare analysis," Economic Modelling, Elsevier, vol. 116(C).

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    More about this item

    Keywords

    compatibility; system competition; standardization; spatial competition model; free entry;
    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
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure

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