A duopoly Logit model with price competition and strategic compatibility

Abstract

This paper provides an analysis of compatibility decisions with oligopolistic price setting in a duopoly logit model. We consider a sequential game in which firms first choose whether they supply compatible products and then set the price which is charged. The equilibrium compatibility configuration is the outcome of a trade-off between consumers valuation of compatibility and the loss of product differentiation which is associated with compatibility. Finally, it is shown that firms incentives towards compatibility tend to be socially insufficient.industrial organization ;