Abstract
This paper proposes a model to analyze compatibility decision problems encountered by network product providers in their attempts to deal with markets which, although segmented, are nevertheless interdependent through the network effect. We demonstrate that the compatibility decisions of these network product providers are influenced by the number of consumers indicating an interest in e-commerce, consumer attitudes towards e-commerce, and the number of firms planning to engage in e-commerce business, with the occurrence of either 'full compatibility' or 'one-way compatibility' outcomes being possible in equilibrium. The intuition behind a one-way compatibility Outcome is that when treated as a Strategic device, the compatibility decision can enhance a brand's competitiveness in the web server software market, at the expense of weakening its competitiveness in the browser market. Therefore, if the network effects on user benefits provided by a web server's Software brand are comparatively small, whilst the network effects on the utility of users of a rival's browser are large, then the network product manufacturer could choose incompatibility.
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