Working Paper: CEPR ID: DP3816
Authors: Uwe Walz; Bernd Woeckener
Abstract: 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.
Keywords: compatibility decisions; installed home base; international network effects; standardization bodies; third-market competition
JEL Codes: F12; L15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Weak network effects (D85) | Higher installed bases under compatibility (L15) |
| Higher installed bases under compatibility (L15) | Suppliers opt for compatibility (L15) |
| Suppliers opt for compatibility (L15) | Higher profits for both suppliers (D49) |
| Strong network effects + Significant home market size advantage (D85) | Suppliers maintain incompatibility (L15) |
| Suppliers maintain incompatibility (L15) | Monopolize the third market (D42) |
| Monopolize the third market (D42) | Limit pricing (D49) |
| Limit pricing (D49) | Welfare losses (D69) |