Network Compatibility: Joint Adoption Versus Individual Decisions

In this paper we consider the problem of compatibility between networks when the consumers of a network service value the capacity of the network itself rather than the number of users. Compatibility decisions are modelled as the outcome of a three stages game where strategies include compatibility, capacity levels and prices. Two main questions are studied. First, will the result of this game differ from the outcome of a joint adoption procedure, where compatibility is adopted if and only if all the firms in the industry agree? Second, what are the effects of compatibility adoption on the network sizes? These questions are examined in a duopolistic framework where competition occurs between vertically differentiated products whose perceived qualities depend on their respective producers and on the competitor's network capacity when compatibility prevails.