Duopoly compatibility standards with partial cooperation standards leadership

Abstract This paper presents a model of duopolists producing differentiated substitutes. Greater compatibility between the products causes each to have a greater demand. However, each firm has a most desired location in the product space (a most preferred technical standard); deviation from that standard in the direction of the rival's standard increases compatibility, but is costly. This paper presents the equilibrium outcomes for two products under Cournot rivalry, multiproduct monopoly, second-best standards-specification, and welfare maximization. The outcome associated with partial cooperation is examined. Then the Stackelberg model is used to derive the equilibrium conditions for output leadership and technical standards leadership. This model of technological externalities allows us to compare and evaluate different standards-specification processes.