A Replicator Dynamic and Simulation Analysis of Network Externalities and Compatibility Among Standards

In the presence of network externalities, compatibility and tying or bundling of standards may be employed as strategic tools. This has reportedly been done by, e.g., many competitors in ICT industries. It remains, however, less clear which mechanisms exactly are exploited and in what way. The present paper investigates the economic role of compatibility or incompatibility of tied standards for the dynamics of competition between standards. A replicator model operating on an aggregated level is complemented by an agent-based simulation that takes into account the network structure among users and by an empirical example from the information technology sector. A variety of effects and strategic options of vendors of the standards are studied, including the role of initial usage share distribution, controlling the inter-subsectoral compatibility, setting up new competitors, and utilizing properties of the network such as central or peripheral positioning of agents (Feld's friendship paradox). The agent-based model contrasts a complete network and a regular ring network with asymmetric network structures derived from Barabàsi and Albert's preferential attachment mechanism and triadic closure. Though this explores only a small subset of the theoretically possible effects, it may contribute to a better understanding of strategic interaction in the presence of network externalities.