Systems and standards competition Competition between networks does not always lead to one survivor Each network may have its own system Compatibility issues What is gained and lost when consumers cannot use their brand of the product on other systems? Competition to be the Industry standard -Firms may compete to have their system adopted as the industry standard What are the implications of standards competition?
10 Systems and Standards Competition • Competition between networks does not always lead to one survivor • Each network may have its own system —Compatibility issues —What is gained and lost when consumers cannot use their brand of the product on other systems? • Competition to be the Industry Standard —Firms may compete to have their system adopted as the industry standard —What are the implications of standards competition?
echnical Fear or being incompatible ca Both switching N lead to the inferior Nash Equilibrium neither firm switches because it to the new ayin technolog thinks the other won't switc s a old supenor technolog Nash yis a Firm 2 Nash s Inertia Old New Equilibri Technolog Technolog Old echnolog 5,4) (2,2) irm 1 ew (1,5) (6,7) Technolog
11 Competition and Technical Compatibility Firm 1 Old Technolog y Old Technolog y New Technolog y (5,4) (2, 2) (1, 5) The fight over compatibility can lead to poor technical choices overall New Technolog y Firm 2 (6,7) Excess Inertia Two possible problems: Excess Inertia and Excess Momentum Both staying with the old technolog y is a Nash Equilibriu m Both switching to the new technology is a superior Nash Equilibrium Fear of being incompatible can lead to the inferior Nash Equilibrium— neither firm switches because it thinks the other won’t switch
Both Both sta Again, fear of being incompatible can itching with the o o the new ead to the inferior Nash Equilibriu techno Is a ne yis a supenor possible th ere is cess mome Nash ash ongly switchl s to the New Technolo Equilib Librium Firm 2 m Excess Mohrentunm Old New ○ Technolog| Technolog old echnolog °(6,7) (2,2)○ irm 1 ew (1,5) 5,4) Technolog
12 Technical Compatibility 2 Firm 1 Old Technolog y Old Technolog y New Technolog y (6,7) (2, 2) (1, 5) In the case of excess inertia, each firm wants to adopt the same technology as its rival but, fearful that the rival won’t switch to the new technology, each wrongly stays with the old New Technolog y Firm 2 (5,4) Excess Momentum It is also possible that there is Excess Momentum and each wrongly switches to the New Technology Both switching to the new technolog y is a Nash Equilibriu m Both staying with the old technology is a superior Nash Equilibrium Again, fear of being incompatible can lead to the inferior Nash Equilibrium
Technical Compatibility 3 The excess Inertia and Excess Momentum cases apply to market settings where the network gains from compatibility and“ connectedness” are large both firms want to adopt a common technolo gy Difficulty in agreeing which technology both should use Sometimes firms will not have a preference to make their technology the common standard or not to have a common technology at all Different technologies loses compatibility But different technologies differentiates each product and softens price competition, e.g., Play Station 3 VS. Wil vS X-BoX
13 Technical Compatibility 3 • The Excess Inertia and Excess Momentum cases apply to market settings where the network gains from compatibility and “connectedness” are large – both firms want to adopt a common technology – Difficulty in agreeing which technology both should use • Sometimes firms will not have a preference to make their technology the common standard or not to have a common technology at all – Different technologies loses compatibility – But different technologies differentiates each product and softens price competition, e.g., PlayStation 3 vs. Wii vs. X-Box
choosing O Firm osIng tech STRATEGIES y and build an early lead by establishing a large installed base, and 2)convince the suppliers of complements to dopt your preferred technologycom =e0 rium prere y Frn Firm 2 Battle of the Sexes echnology echnolo Technology (10, 7) (6,5)○ irm 1 Technology (5, 4) (8,12)°
14 Technical Compatibility 4 Firm 1 Technology 1 Technology 1 Technology 2 (10,7) (6,5) (5,4) Assume there are two technologies, Firm 1’s technology 1 and Firm 2’s technology 2 Technology 2 Firm 2 (8,12) Battle of the Sexes In Battle of the Sexes firms still agree that there should be a common standard but each wants its own technology to be the standard Firm 1 choosing technology 1 and Firm 2 choosing technology 1 is the Nash Equilibrium preferred by Firm 1 Firm 1 choosing technology 2 and Firm 2 choosing technology 2 is the Nash Equilibrium preferred by Firm 2 STRATEGIES: • build an early lead by establishing a large installed base; and 2) convince the suppliers of complements to adopt your preferred technology