Strategic product compatibility in network industries

This article considers a product’s compatibility as a strategic variable in a Cournot duopoly with network consumption externalities. It develops a non-cooperative compatibility decision game (CDG) in which firms choose whether to let products be (in)compatible. With costless compatibility, the unique (Pareto-efficient) subgame perfect Nash equilibrium (SPNE) of the CDG is universal compatibility. With quasi-fixed compatibility costs, the SPNE depends on whether product compatibility is an endogenous (i.e., a profit-maximising) or exogenous (i.e., given by technical constraints) variable. In the case of endogenous compatibility, the SPNE can vary from one unique to multiple regimes of (in)compatibility, such as the anti-prisoner’s dilemma (deadlock), prisoner’s dilemma, and coordination game. In the case of exogenous compatibility, the SPNE can become an anti coordination game as well. The article also discusses the welfare outcomes corresponding to the SPNE.