Variable Compatibility Without Network Externalities


Nicholas Economides*


I analyze a model where systems are composed of two components. Hybrid systems, composed of components produced by different firms, require an adapter or interface to function. Through design manipulations, component-producing firms control the price of the adapter which is produced by a competitive sector. I show that, for symmetirc demand, when firms choose non- coorperatively design specifications and prices, they produce fully compatible components, both when the choices are simulatneous and when they are taken in sequence, with the specification choice preceding the price choice. However, if the demand for hybrid systems is relatively small, at equilibrium firms choose to maximize the degree of compatibility of their components.

Key words: Compatibility, Standardization, Components, Adapters.
JEL Classification: L1, D4

* Stern School of Business, New York, NY 10012, tel. (212) 998-0864, fax (212) 995-4218, e-mail:, www: