Compatibility Choices in the Consumer Online Service Industry

Abstract

In the information and telecommunications industry, among others, various kinds of innovative products are being launched. Due to the effect of network externalities on players* performances, the importance of the choice whether to make these products compatible with others cannot be overemphasized. This is also true of the consumer online service industry. Incumbent X.25-based providers are competing with each other and with other entrant Web-based providers and at the same time, trying to make their products compatible with others. Using a game-theoretic model, this paper examines how incumbent and entrant carriers strategically choose the compatibilities of their products. The welfare implications are also presented.