The Study on Technology Standards and Compatibility Choices under Network Externalities

• Main Authors: Hung, Kuang-Peng, 洪廣朋
• Other Authors: Shan-Yu Chou, Yehning Chen
• Format: Others
• Language: zh-TW
• Published: 1997
• Online Access: http://ndltd.ncl.edu.tw/handle/32191876540436397239

博士 === 國立臺灣大學 === 商學研究所 === 85 === System products are those which generate value when combined with their complements. System products, such as computer hardware and software, vedio- casette recorder and vedio tape, automated teller machines and ATM cards, etc, play an important role in modern life. The most distinctive character- istic of system products is the network externality. Positive network exter- nalities arise when a good is more valuable to a user the more users adopt the same good or compatible one. In this study, I intend to investigate two important issues facing the producers of system products: the first is the technological standards ado- pted by the firm, and the second is the compatibility decisions between the competing firms. I construct a two-period duopoly game to analyze these problems. In the first model, the firms can adopt either the incremental innovation which is backward compatible with the old standard or technology revolution which is backward incompatible with the old standard. In markets with heter- ogeneous consumers, network externalities, and fulfilled expectations, it is shown that the factors which influence firms'' adoption of technology standards include: the innovation benefit, the existing installed base of the old stan- dard, the relative technological advantage of the dominant firm, and so on. Other things being equal, this study shows that technological changes does not necessarily favor advanced technology standard. With symmetric duopoly, revolutionary technology will be adopted only if it generates a benefit greater than the sum of the network benefit and the compatibility benefit created by incremental innovation. It is shown that the network benefit and the compatibility benefit are both increasing with network externalities. With asymmetric duopoly, where one firm enjoys technology advantage over the other when they both adopt the incremental innovation. We show that a dominant firm always wants to adopt a strategy different from its inferior rival, but the inferior rival always wants to mimic the dominant firm''s. This gives two managerial implications. First, the dominant firm can opt for an upgraded technology to made the inferior firm trapped in the old standard. Second, when the network externality is strong and the technology advantage of the dominant firm is large, both firms are better off if the dominant takes the leader''s role. This study also finds that the inferior firm''s adoption of an upgraded tech- nology may harm the dominant firm by reducing the latter''s profit. This implies that it can be reasonable for the dominant firm to encourage cloning. The second model investigates whether the firm should made its product com- patible with its rival''s. The literature has emphasized the network effect of compatibility, with little attention being given to the fact that product differentiation can also decrease with compatibility. In this study, we setup a two-stage duopoly game to deal with the latter possibility and how the firms choose the optimal degree of compatibility. This paper shows that the compati- bility choices of the firm depend on the gains from the network effect, the compatibility effect, and the loss from increasing competition. This study also shows that the factors that affect the optimal compatibility choices of the firm include: the existing installed base of the firm, the cost advantage / disadvantage of the firms, and the degree to which compatibility impacts on product differentiation. These results are robust, no matter firms compete in quantity or in prices. Moreover, this study suggests that competition plus co- operation features the relation among firms in system industries.