Compatibility choice in vertically differentiated technologies

We analyse firms' incentives to provide two-way compatibility between two network goodswith different intrinsic qualities. We study how the relative importance of verticaldifferentiation with respect to the network effect influences the price competition as well as thecompatibility choice. The final degree of compatibility allows firms to manipulate the overalldifferentiation. Under weak network effect, full compatibility may arise: the low quality firmhas higher incentives to offer it in order to prevent the rival from dominating the market.Under strong network effect we observe multiple equilibria for consumers' demands. However,in any equilibrium of the full game, coordination takes place on the high quality good which,we assume, always maintains its overall quality dominance....