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The perpetual trouble with network products: Why IT firms choose partial compatibility

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  • Stadler, Manfred
  • Tobler Trexler, Céline
  • Unsorg, Maximiliane

Abstract

Compatibility of network products is an important issue in markets for communication technology as well as hard- and software products. Empirical findings suggest that firms competing in these markets typically choose intermediate degrees of product compatibility. We present a strategic two-stage game of two firms deciding strategically or commonly on the degree of product compatibility in the first stage and on prices in the second stage. Indeed, partial compatibility constitutes a subgame perfect Nash equilibrium when coordination costs of standardization are high and the installed bases are low.

Suggested Citation

  • Stadler, Manfred & Tobler Trexler, Céline & Unsorg, Maximiliane, 2021. "The perpetual trouble with network products: Why IT firms choose partial compatibility," University of Tübingen Working Papers in Business and Economics 150, University of Tuebingen, Faculty of Economics and Social Sciences, School of Business and Economics.
    • Handle: RePEc:zbw:tuewef:150
    DOI: 10.15496/publikation-59233
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    References listed on IDEAS

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    1. Kim, Sang-Hyun & Choi, Jay Pil, 2015. "Optimal compatibility in systems markets," Games and Economic Behavior, Elsevier, vol. 90(C), pages 106-118.
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    Cited by:

    1. Domenico Buccella & Luciano Fanti & Luca Gori, 2023. "Strategic product compatibility in network industries," Journal of Economics, Springer, vol. 140(2), pages 141-168, October.

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    More about this item

    Keywords

    Compatibility; Network Products; Network Effects;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • 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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