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Compatibility between differentiated networks

Compatibility between differentiated networks
Compatibility between differentiated networks
This paper develops a generalised model of network competition when consumers vary in their preferences for network size and location, and networks are vertically and horizontally differentiated. The effect of compatibility on the degree of competition between the networks is analysed. Two effects are identified as central to determining networks' incentives towards compatibility. Compatibility decreases vertical differentiation (and hence increases competition); but it also decreases the importance of market share (and so decreases competition). Which effect dominates depends on the relative importance of horizontal and vertical aspects in consumers' utilities. When network size is a relatively important factor in consumers' utilities, neither the larger nor smaller network in the unique asymmetric equilibrium wishes to be compatible. When horizontal aspects are important, both networks wish to be compatible. For intermediate cases, the larger network does not wish to be compatible, in contrast to the smaller network. The model may explain the dynamics of network industries, particularly interconnection agreements between Internet service providers.
9909
University of Southampton
Mason, R.
1a906445-3ab5-4208-a0fc-4df6e51a2b72
Mason, R.
1a906445-3ab5-4208-a0fc-4df6e51a2b72

Mason, R. (1999) Compatibility between differentiated networks (Discussion Papers in Economics and Econometrics, 9909) Southampton, UK. University of Southampton

Record type: Monograph (Discussion Paper)

Abstract

This paper develops a generalised model of network competition when consumers vary in their preferences for network size and location, and networks are vertically and horizontally differentiated. The effect of compatibility on the degree of competition between the networks is analysed. Two effects are identified as central to determining networks' incentives towards compatibility. Compatibility decreases vertical differentiation (and hence increases competition); but it also decreases the importance of market share (and so decreases competition). Which effect dominates depends on the relative importance of horizontal and vertical aspects in consumers' utilities. When network size is a relatively important factor in consumers' utilities, neither the larger nor smaller network in the unique asymmetric equilibrium wishes to be compatible. When horizontal aspects are important, both networks wish to be compatible. For intermediate cases, the larger network does not wish to be compatible, in contrast to the smaller network. The model may explain the dynamics of network industries, particularly interconnection agreements between Internet service providers.

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Published date: January 1999

Identifiers

Local EPrints ID: 33144
URI: http://eprints.soton.ac.uk/id/eprint/33144
PURE UUID: 67a5f017-ab16-42f6-ae9d-106eafcb0323

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Date deposited: 20 Dec 2007
Last modified: 11 Dec 2021 15:19

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Contributors

Author: R. Mason

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