Market Entry and Choices of Compatibility Decisions of Firms with Network Externalities

Network externality and compatibility are the most significant features of network economy.Furthermore,compatibility between products supplied by different firms is the important feature of network economics and turns out to be a strategic issue in industries exhibiting network externalities.In this paper we study incumbent firms' compatibility decisions when market entry of competitive firm may occur by using a three-stage game theory model with network externalities.The results show that the compatibility decisions of incumbents and the entry of competitive firm strongly depend on the strength degree of network externalities and the entry fixed cost.