Jeong-Yoo Kim

"Product compatability as a signal of quality in a market with network externalities", International Journal of Industrial Organization Volume 20, Issue 7, September 2002, pages 949-64.
JEL codes: L15
Keywords: product compatibility, experience goods, network externalities, signaling

Abstract: This paper considers the compatibility decision as well as signalling devices of the quality of a new technology of which users are not informed. In a general model, I find separating equilibria where compatibility may signal quality. Two specific models are provided in which a firm signals its high quality by making its technology less compatible with, and more compatible with the established technology than under full information. Also, it is shown that, if the production cost is unrelated to the quality, there is no separating equilibrium where the true quality is revealed only through the price.