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Network effects, compatibility decisions, and horizontal product differentiation

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  • Woeckener, Bernd

Abstract

This paper analyzes decisions on (in)compatibility and product design of two competing hardware suppliers in the presence of network effects. We show that they either establish compatibility and differentiate their variants strongly or maintain incompatibility and locate their variants at the center of the consumer distribution. In the latter case, a 'standards war' takes place. Moreover, we show that a commitment to compatibility becomes more attractive for suppliers when it can be done before product designs are fixed because then, it can significantly soften competition in locations. Considering welfare, it turns out that standards wars can be welfare superior to compatibility.

Suggested Citation

  • Woeckener, Bernd, 1999. "Network effects, compatibility decisions, and horizontal product differentiation," Tübinger Diskussionsbeiträge 152, University of Tübingen, School of Business and Economics.
    • Handle: RePEc:zbw:tuedps:152
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    File URL: https://www.econstor.eu/bitstream/10419/47581/1/575620919.pdf
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    More about this item

    JEL classification:

    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
    • 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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