Multihoming and Compatibility

Toker Doganoglu, Center for Information and Network Economics, University of Munich, Germany, and Julian Wright, Department of Economics, National University of Singapore, Singapore

9/12/2008
(Original Publish Date: 9/23/2005)

When competing firms make their services compatible, consumers enjoy greater network benefits. These benefits can also be realized if firms remain incompatible and consumers multihome by purchasing from each of the firms. We find that such multihoming may be a poor substitute for compatibility. Multihoming weakens competition and introduces costs that firms do not internalize. As a result, multihoming can increase the social desirability of compatibility, while making compatibility less attractive for firms. Surprisingly, policymakers should generally be more concerned about the lack of compatibility when multihoming is present. Our results extend to two-sided markets.