Essays on network externalities and compatibility from the perspective of industrial organization

This document consists of three essays on network externalities and compatibility based on game theoretic, industrial organization models.; The first essay explores the alternative fuels market for vehicles. Each firm's strategic behavior includes the decision of whether or not to offer the alternative fuel, and if offered, what price to charge. The consumers then decide whether or not to purchase a converter for use with the alternative fuel, from which station to purchase fuel, and which type of fuel to purchase. The essay demonstrates that depending on the difference between the marginal cost of the standard and alternative fuels, firms may actually prefer competition in selling the alternative fuel.; The second essay demonstrates that a firm may lose market share when it rationally offers a potentially compatible good. In the model, the benefits from compatibility are one-way, and compatibility can only be purchased by those consumers who purchase the potentially compatible product. One-way compatibility forces the competitor to lower its prices which decreases the market share of the potentially compatible firm. However, the added benefits from compatibility increase the market share of the potentially compatible firm. When the potentially compatible firm's uncontested market is limited in size, it is shown that the firm's market share may decrease in equilibrium. Regardless of the change in market share, social welfare increases when at least one consumer purchases compatibility.; The third essay focuses on how the presence of a network externality affects a firm's quality decision. The quality of the good is independent of the network externality. It is shown that for either a small network externality or a low degree of compatibility between products, the quality of the monopolist's product exceeds that of a duopolist's product. However, as both the network externality and the degree of compatibility become relatively large, the quality of a duopolist's product is greater. In addition, it is found that whenever the quality is greater under a duopoly, social welfare also is greater. It is possible, however, that the network size is greater under a duopoly, but social welfare is greater under a monopoly.