Analysis of Compatibility Decisions of Firms Based on Network Externalities

Compatibility 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 new entry firms' compatibility decisions in a horizontal differentiation model with network externalities.A critical point of compatibility decisions,which increases as the strength degree of network externalities decreases,is obtained.When the degree of compatibility is less than the critical point,the entry firm will not take compatibility decisions.Otherwise,the entry firm will chose compatibility decisions to enjoy the installed base of incumbent firm.