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Compatibility choice in vertically differentiated technologies

Author

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  • GARCIA, Filomena

    (ISEG, Technical University of Lisbon)

  • VERGARI, Cecilia

    (Université catholique de Louvain (UCL). Center for Operations Research and Econometrics (CORE))

Abstract

We analyse firms' incentives to provide two-way compatibility between two network goods with different intrinsic qualities. We study how the relative importance of vertical differentiation with respect to the network effect influences the price competition as well as the compatibility choice. The final degree of compatibility allows firms to manipulate the overall differentiation. Under weak network effect, full compatibility may arise: the low quality firm has higher incentives to offer it in order to prevent the rival from dominating the market. Under strong network effect we observe multiple equilibria for consumers' demands. However, in any equilibrium of the full game, coordination takes place on the high quality good which, we assume, always maintains its overall quality dominance.

Suggested Citation

  • GARCIA, Filomena & VERGARI, Cecilia, 2008. "Compatibility choice in vertically differentiated technologies," LIDAM Discussion Papers CORE 2008014, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    • Handle: RePEc:cor:louvco:2008014
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    File URL: https://sites.uclouvain.be/core/publications/coredp/coredp2008.html
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    Cited by:

    1. Alexei Alexandrov, 2008. "Interconnecting Differentiated Networks," Working Papers 08-07, NET Institute, revised Oct 2008.
    2. Alexei Alexandrov, 2015. "Anti-Competitive Interconnection: the effects of the elasticity of consumers' expectations and the shape of the network effects function," Journal of Industrial Economics, Wiley Blackwell, vol. 63(1), pages 74-99, March.

    More about this item

    Keywords

    compatibility; vertical differentiation; network effect.;
    All these keywords.

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality

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