Compatibility and Proprietary Standards: The Impact of Conversion Technologies in IT-Markets with Network Effects

Information Systems Research, v. 22, n. 1, pp. 188-207, March 2011.

Posted: 21 May 2008 Last revised: 2 Aug 2012

See all articles by Charles Z. Liu

Charles Z. Liu

University of Texas at San Antonio; University of Texas at San Antonio

Esther Gal-Or

University of Pittsburgh - Katz Graduate School of Business

Chris F. Kemerer

University of Pittsburgh - Katz Graduate School of Business; Carnegie Mellon University - School of Computer Science

Michael D. Smith

Carnegie Mellon University - H. John Heinz III School of Public Policy and Management

Date Written: April 1, 2009

Abstract

In markets that exhibit network effects, the presence of conversion technologies provides an alternative mechanism to achieve compatibility. This study examines the impact of conversion technologies on market equilibrium in the context of sequential duopoly competition and proprietary technology standards.

We analyze this question by departing from the extant literature to endogenize the decision to provide a converter and incorporate explicit negotiations between firms concerning the extent of conversion. We argue that these choices better reflect the environment facing firms in IT-industries and find that these decisions change some of the established results in the literature.

Specifically, we find that unless network effects are very large, the subgame perfect equilibrium involves firms' agreeing on providing converters at a sufficiently low price to all consumers. At this equilibrium, both the entrant and the incumbent are better off since the provision of converters alleviates price competition in the market and leads to both higher product revenues and higher proceeds from the sale of converters. Moreover, under some circumstances the provision of converters is welfare enhancing.

These findings have important implications for research and practice in the adoption of new digital goods as the introduction of conversion technologies can reduce the social costs of standardization without compromising the benefits of network effects.

Keywords: Network Effects, Network Externalities, Conversion Technologies, Compatibility, Technology Standards, Digital Goods

JEL Classification: L1, L86, O30

Suggested Citation

Liu, Charles Z. and Liu, Charles Z. and Gal-Or, Esther and Kemerer, Chris F. and Smith, Michael D., Compatibility and Proprietary Standards: The Impact of Conversion Technologies in IT-Markets with Network Effects (April 1, 2009). Information Systems Research, v. 22, n. 1, pp. 188-207, March 2011., Available at SSRN: https://ssrn.com/abstract=1134902 or http://dx.doi.org/10.2139/ssrn.1134902

Charles Z. Liu

University of Texas at San Antonio ( email )

San Antonio, TX
United States
210-458-6308 (Phone)

University of Texas at San Antonio ( email )

Department of Information Systems
College of Business, 1 UTSA Circle
San Antonio, TX 78260
United States
210-458-6308 (Phone)

Esther Gal-Or (Contact Author)

University of Pittsburgh - Katz Graduate School of Business ( email )

Pittsburgh, PA 15260
United States

Chris F. Kemerer

University of Pittsburgh - Katz Graduate School of Business ( email )

Pittsburgh, PA 15260
United States
412-648-1572 (Phone)

HOME PAGE: http://www.pitt.edu/~ckemerer/kemerer.htm

Carnegie Mellon University - School of Computer Science

5000 Forbes Avenue
Pittsburgh, PA 15213
United States

Michael D. Smith

Carnegie Mellon University - H. John Heinz III School of Public Policy and Management ( email )

Pittsburgh, PA 15213-3890
United States

HOME PAGE: http://www.heinz.cmu.edu/~mds

Do you have negative results from your research you’d like to share?

Paper statistics

Abstract Views
1,454
PlumX Metrics