– Apple vs. Windows – Sirius XM introduced a player that works with both standards in early 2009 – Apple can design its App store software development kit (SDK) such that it is either easy or difficult to port software to/from Android (and same for Android)
32 Compatibility • Suppose that firm earns π d as duopolist with compatible standards and π m as a monopolist • Lose L from fighting the war • Consider the following schematic... standards war not compatible compatible π d Firm 1 win lose -L π m -L
33 Compatibility • What will the firm choose? • All depends on how costly the standards war is to fight & how monopoly and duopoly payoffs compare • Suppose standards war is like an auction: firms choose marketing dollars and whichever chooses the most dollars wins – Then the advertising auction will compete away all expected profits (and potentially more!). – Firms clearly prefer compatibility • Suppose standards war has no cost (L=0) and the winning firm is chosen with 50% probability (e.g. a standard-setting agent will choose) – Prefer incompatibility if π m >2 π d , which often holds
34 Summary: Network Effects and Standards Wars • Single technologies (last week) – Network externalities = fundamental coordination problem – Firm actions that shape expectations & subsidize adoption are critical • Competing technologies (this week) – Network markets are frequently winner-take-all – Lock-in phenomenon means big payoffs to winner; best technology does not always win – War of attrition can be highly costly, especially because costs are sunk – Choosing incompatibility is high-risk-high-return
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- Fall '15
- Auction, Sirius