Optimal compatibility in systems markets

Research output: Contribution to journalArticlepeer-review

11 Citations (Scopus)


We investigate private and social incentives for standardization to ensure market-wide system compatibility in a two-dimensional spatial competition model. We develop a new methodology to analyze competition on a torus and show that there is a fundamental conflict of interests between consumers and producers over the standardization decision. Consumers prefer standardization with full compatibility because it offers more variety that confers a better match with their ideal specifications. However, firms are likely to choose the minimal compatibility to maximize product differentiation and soften competition. This is in sharp contrast to the previous literature that shows the alignment of private and social incentives for compatibility.

Original languageEnglish
Pages (from-to)106-118
Number of pages13
JournalGames and Economic Behavior
Publication statusPublished - 2015 Mar 1

Bibliographical note

Funding Information:
We thank participants in various conferences and seminars for helpful comments, and Michael Cross for editorial assistance. We are also grateful to two anonymous referees and the Advisory Editor for constructive comments which greatly improved the paper. All errors, if any, are ours. This work was supported by the National Research Foundation of Korea Grant funded by the Korean Government ( NRF-2014S1A5A2A01010660 ) and under Australian Research Council 's Discovery Projects funding scheme (project number DP140100007 ).

Publisher Copyright:
© 2015 Elsevier Inc.

All Science Journal Classification (ASJC) codes

  • Finance
  • Economics and Econometrics


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