The Economics of Networks: Markets for Adapters and Add-ons The Economics of Networks

6. Markets for Adapters and Add-ons

Not enough research has been done on the economics of adapters and interfaces. One strand of the mix-and-match literature assumes that compatibilities introduced by one firm cannot be corrected by the other, so that adapters are unfeasible. Economides (1991a) assumes that adapters are provided by a competitive industry at cost, but decisions of the firms determine the extent of incompatibility, and therefore the cost of the adapters. Farrell and Saloner (1992) assume that converters make the technologies only partially compatible, in the sense that hybrid goods that utilize incompatible components as well as an adapter give lower utility than a system composed of fully compatible components. In this framework, the availability of converters can reduce social welfare, since, in the presence of converters, some consumers would buy the converter and the "inferior" technology rather than the "best" technology, although the "best" technology gives more externalities.

Next Section

Previous Section

Back to Outline