WINDOWS OS VERSUS MAC OS: COULD ONE-WAY COMPATIBILITY BE AN EQUILIBRIUM OUTCOME?

One-way compatibility is a phenomenon often observed in reality and Windows OS versus Mac OS is a good example. A vertical differentiation model is presented herein to analyze system firms' compatibility choices. This paper differs from the existing literature in two aspects: (1) The purebred and hybrid systems are vertically differentiated; (2) Since one-way compatibility is a phenomenon often observed in real life, this paper considers compatibility as being unilateral rather than bilateral and the possibility of one-way compatibility. We find that, depending on the quality of the hybrid system, any state of compatibility could be an equilibrium outcome. When the quality of a hybrid system is very small, both firms adopt compatibility. Second, despite the fact that firms always earn higher profit under full compatibility than they do under incompatibility, the equilibrium outcome is incompatibility when the quality of a hybrid system is very high, which means firms face a prisoners' dilemma under this situation. Finally, since a firm favors incompatibility more when its rivals adopt compatibility than when its rival adopts incompatibility, the equilibrium outcome is one-way compatibility when the quality of a hybrid system is intermediate. From this point of view, this paper provides a theoretical interpretation of one-way compatibility between Windows OS versus Mac OS. We also show that the market outcome is socially inefficient when the hybrid system's quality is relatively high.