Date of this Version
The RAND Journal of Economics
As is well recognized, market dominance is a typical outcome in markets with network effects. A firm with a larger installed base offers a more attractive product which induces more consumers to buy its product which produces a yet bigger installed base advantage. Such a setting is investigated here but with the main difference that firms have the option of making their products compatible. When firms have similar installed bases, they make their products compatible in order to expand the market. Nevertheless, random forces could result in one firm having a bigger installed base, in which case the larger firm may make its product incompatible. We find that strategic pricing tends to prevent the installed base differential from expanding to the point that incompatibility occurs. This pricing dynamic is able to neutralize increasing returns and avoid the emergence of market dominance.
This is the peer reviewed version of the following article: Jiawei Chen, Ulrich Doraszelski, Joseph Harrington (2009), Avoiding Market Dominance: Product Compatibility in Markets with Network Effects, RAND Journal of Economics, 49 (3), 455 - 485, which has been published in final form at http://onlinelibrary.wiley.com/doi/10.1111/j.1756-2171.2009.00073.x/abstract. This article may be used for non-commercial purposes in accordance with Wiley Terms and Conditions for Self-Archiving [link to http://olabout.wiley.com/WileyCDA/Section/id-820227.html#terms].
Chen, J., Doraszelski, U., & Harrington, J. E. (2010). Avoiding Market Dominance: Product Compatibility in Markets With Network Effects. The RAND Journal of Economics, 40 (3), 455-485. http://dx.doi.org/10.1111/j.1756-2171.2009.00073.x
Date Posted: 27 November 2017
This document has been peer reviewed.