Optimal compatibility in systems markets

We investigate private and social incentives for standardization to ensure market-wide system compatibility in a two-dimensional spatial competition model. We develop a new methodology to analyze competition on a torus and show that there is a fundamental conflict of interests between consumers and producers over the standardization decision. Consumers prefer standardization with full compatibility because it offers more variety that confers a better match with their ideal specifications. However, firms are likely to choose the minimal compatibility to maximize product differentiation and soften competition. This is in sharp contrast to the previous literature that shows the alignment of private and social incentives for compatibility

Mixed Bundling in Oligopoly Markets

This paper provides a framework for studying competitive mixed bundling with an arbitrary number of firms. We examine both a firm's incentive to introduce mixed bundling and equilibrium tariffs when all firms adopt the mixed-bundling strategy. We develop a method to derive the equilibrium prices, and also offer a simple approximation of the equilibrium prices when the number of firms is large. In the duopoly case, relative to separate sales, mixed bundling has ambiguous impacts on prices, profit and consumer surplus. While with many firms mixed bundling lowers all prices, harms firms and benefits consumers under a mild condition

The Perpetual Trouble with Network Products - Why IT Firms Choose Partial Compatibility

Compatibility of network products is an important issue in markets for communication technology as well as hard- and software products. Empirical findings suggest that firms competing in these markets typically choose intermediate degrees of product compatibility. We present a strategic two-stage game of two firms deciding strategically or commonly on the degree of product compatibility in the first stage and on prices in the second stage. Indeed, partial compatibility constitutes a subgame perfect Nash equilibrium when coordination costs of standardization are high and the installed bases are low

Upstream bundling and leverage of market power

We present a novel rationale for bundling in vertical relations. In many markets, upstream firms compete to be in the best downstream slots (e.g., the best shelf in a retail store or the default application on a platform). Bundling by a multiproduct upstream firm can soften competition for slots by reducing rivals' value for them. This strategy does not rely on entry deterrence and can be achieved through contractual or even virtual tying. We also study the effects of upstream bundling on the downstream market; by intensifying competition there, bundling can leave consumers better-off even when there is foreclosure upstream

Mixed Bundling in Oligopoly Markets

This paper proposes a framework for studying competitive mixed bundling with an arbitrary number of firms. We examine both a firm’s incentive to introduce mixed bundling and equilibrium tariffs when all firms adopt the mixed-bundling strategy. In the duopoly case, relative to separate sales, mixed bundling has ambiguous impacts on prices, profit and consumer surplus; with many firms, however, mixed bundling typically lowers all prices, harms firms and benefits consumers

Dominance and Competitive Bundling

We study bundling by a dominant multi-product firm facing competition from a rival multi-product firm. Compared to competition under independent pricing, competition under pure bundling reduces (increases) each firm's profit for low (high) levels of dominance, while for intermediate levels of dominance, it increases the dominant firm's profit but reduces the rival's profit. The latter result provides a justification for the use of contractual bundling to build entry barrier. When we allow for mixed bundling, we find a threshold level of dominance above which the unique outcome is the one under pure bundling

Dominance and Competitive Bundling

We study bundling by a dominant multi-product firm facing competition from a rival multi-product firm. Compared to competition under independent pricing, competition under pure bundling reduces (increases) each firm's profit for low (high) levels of dominance, while for intermediate levels of dominance, it increases the dominant firm's profit but reduces the rival's profit. The latter result provides a justification for the use of contractual bundling to build entry barrier. When we allow for mixed bundling, we find a threshold level of dominance above which the unique outcome is the one under pure bundling

Competitive Bundling

This paper proposes a model of competitive bundling with an arbitrary number of firms. In the regime of pure bundling, we find that relative to separate sales pure bundling tends to raise market prices, benefit firms, and harm consumers when the number of firms is above a threshold. This is in contrast to the findings in the duopoly case on which the existing literature often focuses. Our analysis also sheds new light on how consumer valuation dispersion affects price competition more generally. In the regime of mixed bundling, having more than two firms raises new challenges in solving the model. We derive the equilibrium pricing conditions and show that when the number of firms is large, the equilibrium prices have simple approximations and mixed bundling is generally pro-competitive relative to separate sales. Firms' incentives to bundle are also investigated

Competitive Bundling

This paper proposes a model of competitive bundling with an arbitrary number of firms. In the regime of pure bundling, we find that relative to separate sales pure bundling tends to raise market prices, benefit firms, and harm consumers when the number of firms is above a threshold. This is in contrast to the findings in the duopoly case on which the existing literature often focuses. Our analysis also sheds new light on how consumer valuation dispersion affects price competition more generally. In the regime of mixed bundling, having more than two firms raises new challenges in solving the model. We derive the equilibrium pricing conditions and show that when the number of firms is large, the equilibrium prices have simple approximations and mixed bundling is generally pro-competitive relative to separate sales. Firms' incentives to bundle are also investigated