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Nicolas Jonard and Eric Schenk
''A note on compatibility and entry in a circular model of product differentiation''
( 2004, Vol. 12 No.1 )
Consider an industry in which network goods are supplied by two horizontally differentiated firms facing the threat of a potential entrant. Firms' dilemma is between occupying the product space by selling very differentiated (incompatible) goods, and supplying compatible goods that offer higher utilities hence can be charged a higher price to consumers but are also closer substitutes. The compatibility-entry-price game is solved backward when firms and consumers are located on a circular product space. It turns out that strong externalities can favour entry, as merging the networks and accommodating entry can be preferred by the incumbents.
Keywords: compatibility
L1 - Market Structure, Firm Strategy, and Market Performance: General
Manuscript Received : Nov 10 2003 Manuscript Accepted : Jan 08 2004

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