Avoiding market dominance: Product compatibility in markets with network effects

Arbeitspapier

As is well-recognized, market dominance is a typical outcome in markets with network effects. A firm with a larger installed base others a more attractive product which induces more consumers to buy its product which produces a yet bigger installed base advantage. Such a setting is investigated here but with the main difference that firms have the option of making their products compatible. When firms have similar installed bases, they make their products compatible in order to expand the market. Nevertheless, random forces could result in one firm having a bigger installed base in which case the larger firm may make its product incompatible. We find that strategic pricing tends to prevent the installed base differential from expanding to the point that incompatibility occurs. This pricing dynamic is able to neutralize increasing returns and avoid the emergence of market dominance.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Working Paper ; No. 537

Classification and Topics

• Classification: Wirtschaft
• Subject: Marktmacht ; Produktdifferenzierung ; Produktpolitik ; Netzeffekt

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Chen, Jiawei ; Doraszelski, Ulrich ; Harrington (Jr.), Joseph E.
• Event: Veröffentlichung
• (who): The Johns Hopkins University, Department of Economics
• (where): Baltimore, MD
• (when): 2007

Further information

• Handle: http://hdl.handle.net/10419/72025
• Last update: 10.03.2025, 11:44 AM CET