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Review of Network Economics

Editor-in-Chief: Grzybowski, Lukasz

Ed. by Briglauer, Wolfgang / Goetz, Georg / Pereira, Pedro

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Volume 12, Issue 2

Issues

Volume 15 (2016)

Volume 14 (2015)

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Volume 12 (2013)

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Volume 1 (2002)

Compatibility and the Product Life Cycle in Two-Sided Markets

Masayoshi Maruyama
  • Corresponding author
  • Kobe University, Graduate School of Business Administration, 2-1 Rokkodai, Nada-ku, Kobe 657-8501, Japan
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  • Other articles by this author:
  • De Gruyter OnlineGoogle Scholar
 / Yusuke Zennyo
  • Kobe University, Graduate School of Business Administration, 2-1 Rokkodai, Nada-ku, Kobe 657-8501, Japan
  • Other articles by this author:
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Published Online: 2013-05-09 | DOI: https://doi.org/10.1515/rne-2013-0011

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Abstract

We consider a case in which two competing suppliers of hardware devices and content each chooses whether to make its content compatible with the other’s device. Our main result is that the outcome of these choices depends upon whether the firms’ major source of profit lies in the sale of hardware devices or in royalties from the sale of content. If the hardware is the main source of profit then incompatibility is a dominant strategy. If royalties are the main source of profit then compatibility is the dominant strategy. Which of these situations attains is likely to change over the product life cycle. We add to the literature by showing the equilibrium structure of compatibility in a two-sided market.

Keywords: compatibility; platform; product life cycle; two-sided markets; JEL Classification: D43, L13, L14, L15, L22

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About the article

Corresponding author: Masayoshi Maruyama, Kobe University, Graduate School of Business Administration, 2-1 Rokkodai, Nada-ku, Kobe 657-8501, Japan, Tel.: +81 788036940, Fax: +81 788036940

Published Online: 2013-05-09

Published in Print: 2013-06-01

See Gilbert (1992), Katz and Shapiro (1994), Economides and White (1994), Economides (1996), Farrell and Klemperer (2007), and Shy (2011) for surveys on network effects and compatibility.

See also the seminal papers by Caillaud and Jullien (2003), Rochet and Tirole (2006), and Armstrong and Wright (2007). For surveys on two-sided markets, see Roson (2005) and Rysman (2009).

It is assumed that contents available on the two platforms are mutually exclusive. In reality, however, there are common contents supplied to several platforms (e.g., Amazon and Apple have a large overlap in their selection of e-books). Even when we relax this assumption and allow n kinds of common contents between two platforms in addition to exclusive contents, we can demonstrate the results qualitatively similar to those described in the propositions in Section 5. Proof is available upon request.

Farrell and Saloner (1992) study the economics of “converters” in single-sided markets with direct network externalities.

Citation Information: Review of Network Economics, Volume 12, Issue 2, Pages 131–155, ISSN (Online) 1446-9022, ISSN (Print) 2194-5993, DOI: https://doi.org/10.1515/rne-2013-0011.

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[2]
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