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Optimal compatibility in systems markets
Institution:1. School of Economics and the ESRC Centre for Competition Policy, University of East Anglia, UK;2. Department of Economics, Michigan State University, USA;3. School of Economics, Yonsei University, Republic of Korea;1. Microsoft Research, Herzliya, Israel;2. Department of Economics, The Hebrew University, Jerusalem 91905, Israel;3. Computer and Information Sciences, University of Pennsylvania, Philadelphia, PA 19104, USA;1. Faculty of Industrial Engineering and Management, Technion – Israel Institute of Technology, Israel;2. Nuffield College and Department of Economics, University of Oxford, United Kingdom;1. University Bonn, Department of Economics, Institute for Microeconomics, Adenauer Allee 24-42, D-53113 Bonn, Germany;2. Humboldt-Universität zu Berlin, Institute for Economic Theory 1, Spandauer Str. 1, D-10178 Berlin, Germany;1. School of Information, University of Michigan, 105 South State Street, Ann Arbor, MI 48109, United States;2. Department of Economics, School of Economics and Management, Tsinghua University, Beijing, China;3. Institute for Empirical Economic Research, University of Zurich, CH-8006 Zurich, Switzerland;4. Department of Economics, University of Konstanz, Box D-131, D-78457 Konstanz, Germany;5. Thurgau Institute of Economics, Hauptstrasse 90, CH-8280 Kreuzlingen, Switzerland;6. Department of Economics, State University of New York at Buffalo, Amherst, NY 14260-1520, United States
Abstract:We investigate private and social incentives for standardization to ensure market-wide system compatibility in a two-dimensional spatial competition model. We develop a new methodology to analyze competition on a torus and show that there is a fundamental conflict of interests between consumers and producers over the standardization decision. Consumers prefer standardization with full compatibility because it offers more variety that confers a better match with their ideal specifications. However, firms are likely to choose the minimal compatibility to maximize product differentiation and soften competition. This is in sharp contrast to the previous literature that shows the alignment of private and social incentives for compatibility.
Keywords:Compatibility  System competition  Standardization  Spatial competition model
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