Product compatibility as a signal of quality in a market with network externalities |
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| Affiliation: | 1. School of Economics, Sichuan University, No.24 South Section 1, Yihuan Road, Chengdu 610065, China;2. Department of Economics, National University of Singapore, 117570, Singapore;1. Theoretical Statistics and Mathematics Unit, Indian Statistical Institute, Kolkata 700108, India;2. Department of Economics, University of Cincinnati, Cincinnati, OH 45221, USA;3. Department of Economics, University of Florida, PO Box 117140, Gainesville, FL 32611, USA |
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| Abstract: | In this paper, I consider the compatibility decision as a signaling device of the quality of a newly introduced technology of which users are not informed. Provided that firms are located sufficiently far apart in Hotelling’s [0,1] interval, I find separating equilibria where low compatibility signals high quality. This possible separation is due to the fact that low compatibility is more advantageous to the high-quality entrant than to the low-quality entrant, since it can prevent users of the established technology from enjoying network benefits from the new technology very much. |
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