Compatibility Incentives of a Large Network Facing Multiple Rivals

Under network effects, we analyze when a firm with the largest market share of installed-base customers prefers incompatibility with smaller rivals that are themselves compatible. With incompatibility, consumers realize that intra-network competition makes the rivals' network more aggressive than a single-firm network in adding customers. Consequently, under incompatibility the unique equilibrium can entail tipping away from the largest firm whatever its market share. The largest firm is more likely to prefer incompatibility as its share rises (above fifty per cent is necessary) or the potential to add consumers falls; the number of rivals and strength of network effects have ambiguous implications.

[1]  S. Salop,et al.  Cost-Raising Strategies , 1987 .

[2]  D. North Competing Technologies , Increasing Returns , and Lock-In by Historical Events , 1994 .

[3]  P. David Clio and the Economics of QWERTY , 1985 .

[4]  R. Gilbert An Economist's Guide to U , 2001 .

[5]  Sean F. Ennis Network Connection and Disconnection , 2002 .

[6]  B. Klein The Microsoft Case: What Can a Dominant Firm Do to Defend its Market Position? , 2001 .

[7]  Nicholas Economides,et al.  Compatibility and Market Structure for Network Goods , 1997 .

[8]  Enrique de Alba,et al.  AN ECONOMIST'S GUIDE TO THE , 1995 .

[9]  C. Shapiro,et al.  Technology Adoption in the Presence of Network Externalities , 1986, Journal of Political Economy.

[10]  K. R. Conner,et al.  Software piracy: an analysis of protection strategies , 1991 .

[11]  Neil Gandal,et al.  NETWORK EFFECTS, SOFTWARE PROVISION, AND STANDARDIZATION* , 1992 .

[12]  Gerald R. Faulhaber Network effects and merger analysis: instant messaging and the AOL–Time Warner case , 2002 .

[13]  Neil Gandal,et al.  Compatibility, Standardization, and Network Effects: Some Policy Implications , 2002 .

[14]  C. Shapiro,et al.  Network Externalities, Competition, and Compatibility , 1985 .

[15]  Hans Jarle Kind,et al.  Do incumbents have incentives to degrade interconnection quality in the internet , 2003 .

[16]  David A. Malueg,et al.  INTERCONNECTION INCENTIVES OF A LARGE NETWORK , 2002 .

[17]  Michael L. Katz,et al.  An Economist's Guide to U.S. V Microsoft , 2001 .

[18]  Nicholas Economides,et al.  Network Externalities, Complementarities, and Invitations to Enter , 1996 .

[19]  Bridger M. Mitchell,et al.  Advances in Routing Technologies and Internet Peering Agreements , 2001 .

[20]  Pierre Regibeau,et al.  A selective review of the economics of standardization. Entry deterrence, technological progress and international competition , 1996 .

[21]  John W. Mayo,et al.  Regulation, Vertical Integration and Sabotage , 2003 .

[22]  E. Thompson,et al.  Divisionalization and Entry Deterrence , 1986 .

[23]  S. Besen,et al.  Compatibility Standards, Competition, and Innovation in the Broadcasting Industry , 1986 .

[24]  Joseph Farrell,et al.  Installed base and compatibility : innovation, product preannouncements and predation , 1986 .

[25]  Jacques Crémer,et al.  Connectivity in the Commercial Internet , 2003 .

[26]  Heli Koski,et al.  Survey on Competing in Network Industries: Firm Strategies, Market Outcomes, and Policy Implications , 2004 .

[27]  M. Armstrong Competition in Two-Sided Markets ¤ , 2005 .

[28]  Nancy Gallini,et al.  Second-sourcing as a Commitment: Monopoly Incentives to Attract Competition - eScholarship , 1986 .

[29]  Michael L. Katz,et al.  An Economist's Guide toU.S. v. Microsoft , 2001 .

[30]  N. Economides The Economics of Networks , 1995 .

[31]  B. Bental,et al.  Network Competition, Product Quality, and Market Coverage in the Presence of Network Externalities , 1995 .

[32]  Lisa N. Takeyama The Welfare Implications of Unauthorized Reproduction of Intellectual Property in the Presence of Demand Network Externalities , 1994 .

[33]  Jean-Charles Rochet,et al.  Two-Sided Markets: An Overview ∗ , 2004 .

[34]  Jeffrey H. Rohlfs A theory of interdependent demand for a communications service , 1974 .

[35]  Robin Mason,et al.  The Economics of the Internet: Infrastructure and Regulation , 2001 .

[36]  P. Klemperer,et al.  Coordination and Lock-In: Competition with Switching Costs and Network Effects , 2006 .