Network Externalities, Market Entry And Compatibility

Compatibility is referred to the accessibility and convertibility between different products. It is a crucial factor in the industries with network externalities (such as Communications,the Internet,Computer hardware and software,Banking services and Aviation services) . With the advent of information age, more and more industries have the characteristics of the network externalities, the importance of compatibility as a kind of strategic behavior and the means of competition is increasingly prominent. For many enterprises, compatibility is not only a technical problem, but also about an enterprise's strategy to operate successfully or abortively. Historically, enterprises which got huge success by selecting the appropriate strategy of compatibility were not unusual, such as Microsoft decisively adopted the technical incompatible strategy, making its rapid growth in operating system markets and becoming monopolies.Based on the previous theory study about the compatibility options, using the research tools such as the game theory and the theory of industrial organization, this study concentrates on the compatibility selection under different market structures.The main research work and achievements can be summarized as follows:①This paper studies mainly on the compatibility options of incumbent companies and new entrants into the enterprise under different market structures, and the second chapter studies compatibility strategy options of new incumbents and the incumbent companies under the market structure of monopoly . In chapter III and chapter IV the choices of compatibility strategies for incumbent firms and new entrants to the business under the competitive market structure are studied. The monopoly of the market structure means that there is only an incumbent in the enterprise prior to new entrants; this paper mainly studies the choices of compatibility strategies of two companies in the competitive markets, among which Chapter III does research on the compatibility options of new entrants and business alliances which is combined of the two incumbent firms, while the fourth chapter researches the choices of compatibility strategies of new entrants and two incumbent firms which are not compatible. The research results show that the incumbent firms prefer the compatibility strategy. When new entrants enter into one industry, the best strategy for the incumbent firms is to be compatible with them. However, whether the entering enterprise is compatible depends on the cost of compatibility. When there exists no or low compatible cost, the new entrants choose to be compatible with incumbent firms. While the cost exceeds the profit of compatibility, the new entrants will choose the strategy of incompatibility. In addition, this paper also gets the following conclusion: the enterprise product prices move inversely to the strength of network externalities, that is to say , the network externalities is stronger, the enterprise product price is lower ; the network externalities intensify competitions between enterprises on product prices. But the enterprise product price and the compatibility change towards the same direction, namely enterprise product prices rise with enterprises compatibility. Compatibility between the enterprise moderates price competitions.②In this paper, the compatible cost is a very important factor in the model. The competition between the incumbent firms and new entrants is divided into compatibility decision-making stage and price competition stage. In the decision-making stage, they should not only make their own compatibility strategy decisions, but also they should decide the compatible cost through negotiation. Compatible cost is the patent fee paid by new entrants to the incumbent firms when the incumbent firms open its technical standards to new entrants. The research results show that, when the market has only a monopolistic enterprise or two incumbent firms in the market are compatible, the compatible cost is greater than zero, while the cost dimension depends on bargaining power. When two incumbent firms in the market are incompatible, the compatible cost will be close to zero or even negative, namely new entrants do not need to pay the patent fee, even the incumbent firms will pay certain costs to the new entrants in order to attract them to be compatible with each other.This paper carries on compatibility and incompatibility between incumbent firms under the competitive market structure, analyzes the optimal strategies between the new entrants and incumbent firms in different situations, and also discusses emphatically about influences the compatible cost made on strategy equilibrium between firms under different market structures. This paper will further perfect the compatibility theory.