A Duopoly Model of Technological Externalities: Standards and Compatibility

Sanford V. Berg, Florida Public Utilities Professor, Department of Economics, University of Florida.

9/12/2008
(Original Publish Date: 12/27/1993)

The existence of technological incompatibilities means that components from one system cannot be used with a basic product which is part of another system without an adaptor or (potentially 'costly) modifications. Demand for the basic product would be higher if all producers of the basic product adopted identical (or even "similar") technical standards. However, deviations from a firm's preferred standard will raise that firm's production costs. This paper develops a duopoly model, wherein each firm simultaneously chooses a technical standard and output level for a basic product. In this model, compatibility can promote competition. Results for rivalry are compared with the mandated second-best standards and welfare maximizing outcomes.