JOURNAL ARTICLE
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Network Effects, Compatibility Decisions, and Monopolization
Journal of Contextual Economics – Schmollers Jahrbuch, Vol. 119 (1999), Iss. 1 : pp. 23–44
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Woeckener, Bernd
Abstract
This paper presents an asymmetric Hotelling model with network effects in order to analyze the compatibility decision of a dominant hardware supplier. There are two horizontally differentiated variants of the hardware component of a hardware-software system, and one of the two has a quality advantage. Among other things, we show under what circumstances the dominant supplier monopolizes the market via maintaining incompatibility Against the background of a reasonable welfare-theoretical second-best benchmark, it turns out that such a monopolization can be welfare superior to a coexistence of compatible variants both in cases where it actually occurs and in cases where the suppliers prefer compatibility.