Network effects, compatibility decisions, and horizontal product differentiation

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Dokumentart: WorkingPaper
Date: 1998
Source: Tübinger Diskussionsbeiträge der Wirtschaftswissenschaftlichen Fakultät ; 152
Language: English
Faculty: 6 Wirtschafts- und Sozialwissenschaftliche Fakultät
Department: Wirtschaftswissenschaften
DDC Classifikation: 330 - Economics
Keywords: Kompatibilität , Produktdifferenzierung
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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.

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