DP3816 Compatibility Decisions, Endogenous Installed Home Bases and the Third-Market Competition

Author(s): Uwe Walz, Bernd Woeckener
Publication Date: March 2003
Keyword(s): compatibility decisions, installed home base, international network effects, standardization bodies, third-market competition
JEL(s): F12, L15
Programme Areas: International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=3816

This Paper analyses the compatibility decisions of two regional monopolistic suppliers of a network-effect good who first build up installed bases in their respective home region and then compete in a third market. We show that with weak network effects, installed home bases always are higher under compatibility and suppliers always opt for compatibility. With strong network effects, home markets are covered, and given a sufficiently high home-market size advantage both the favoured supplier and a regional standardization body maintain incompatibility in order (to enable the supplier) to monopolize the third market via limit pricing. As incompatibility always results in a welfare loss, this is a strong case for a global standardization body.