Analysis of Compatibility Decisions of Firms in the Network Economy

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 differentiation model with network externalities,while the incumbent firms' compatibility decisions are also considered.In our analysis,the compatibility decisions of entry firm and incumbent firm are obtained by network externality,the differences of quality and switching-cost,which is endogenous by the degree of compatibility.In equilibrium we find network externality,the differences of quality and switching-cost are the crucial factors to decide the market power between the entry firm and incumbent firm.