Athanasopoulos, Thanos (2014) Compatibility, intellectual property, innovation and efficiency in durable goods markets with network effects. Working Paper. University of Warwick. Department of Economics. Warwick economics research papers series (TWERPS), Volume 2014 (Number 1043). (Unpublished)

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Abstract

This paper analyses firms' behaviour towards compatibility and the relation of these decisions with their incentives to invest into improving their durable, network goods. By using a sequential game where the dominant firm plays first, we give its competitor the ability to build on innovations previously introduced by the market leader. Recognizing the intertemporal linkage in forward looking customers' purchasing choices, we find that in anticipation of a relatively large quality improvement by the rival, strategic pricing leads the dominant firm to support compatibility even if it could exclude its rivals by using a patent for its invention. Furthermore, not only doesn't interoperability de-facto maximise social welfare but we also identify no market failure when network effects are not particularly strong.

Item Type:	Working or Discussion Paper (Working Paper)
Subjects:	H Social Sciences > HB Economic Theory
Divisions:	Faculty of Social Sciences > Economics
Library of Congress Subject Headings (LCSH):	Technological innovations -- Econometric models, Pricing
Series Name:	Warwick economics research papers series (TWERPS)
Publisher:	University of Warwick. Department of Economics
Official Date:	27 March 2014
Dates:	Date Event 27 March 2014 Available
Volume:	Volume 2014
Number:	Number 1043
Number of Pages:	29
Status:	Not Peer Reviewed
Publication Status:	Unpublished
Access rights to Published version:	Open Access

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