When buyers value products in terms of the expected compatibility between the current and the new vintage, firms can invest strategically in R&D to control for the switching costs. Open announcements of R&D budgets transmit information. The announcements determine the buyers' beliefs of the compatibility. As only an efficient firm finds it optimal to have a large R&D-budget, a firm can signal its unit cost. The likely outcome is a unique separating equilibrium if the marginal cost of R&D is low but the uncertainty over the rival's unit cost large. With high R&D cost, the dominating motive is to affect the rival's cost belief.
This is a preview of subscription content, log in via an institution to check access.
Similar content being viewed by others
References
T. Andersen and M. Hviid, Prices and information under imperfect competition, Scott. J. Polit. Econ. 46(3) (1999) 245–259.
R. Aoki and D. Reitman, Simultaneous signalling through investment in an R&D game with private information, Games Econ. Behav. 4(3) (1992) 327–346.
C. d'Aspremont and A. Jacquemin, Co-operating and non-co-operating R&D in a duopoly with spillovers, Am. Econ. Rev. 78 (1988) 1133–1137.
B. Bayus, S. Jain and A. Rao, Truth or consequences: An analysis of vapourware and new product announcements, J. Mark. Res. 38(1) (2001) 10–41.
S. Bhattacharya and J. Ritter, Innovation and communication. Signalling with partial disclosure, Rev. Econ. Stud. 50 (1983) 331–346.
J. Brander and B. Spencer, Strategic commitment with R&D: The symmetric case, Bell J. Econ. 14 (1983) 225–235.
J. Choi, Information concealment in the theory of vertical integration, J. Econ. Behav. Organ. 35 (1998) 117–131.
D. Collie and M. Hviid, Export subsidies as signals of competitiveness, Scand. J. Econ. 95(3) (1993) 327–339.
R. Gertner, R. Gibbons and D. Scharfstein, Simultaneous signalling to the capital and product markets, Rand J. Econ. 19(2) (1988) 173–190.
S. Greenstein, Did installed base give an incumbent any (measurable) advantages in federal computer procurement? Rand J. Econ. 24 (1993) 19–39.
S. Greenstein, Lock-in and costs of switching mainframe computer vendors: What do buyers see? Ind. Corp. Change 6(2) (1997) 247–271.
IBM 360/370/3090/390 (2002), http://www.beagle-ears.com/lars/engineer/comphist/ibm360.htm (Accessed April 2002).
M. Katz and C. Shapiro, Network externalities, competition and compatibility, Am. Econ. Rev. 75 (1985) 424–440.
D. Kreps and J. Scheinkman, Quantity precommitment and Bertrand competition yield Cournot outcomes, Bell J. Econ. 14(2) (1983) 326–337.
D. Kreps and R. Wilson, Sequential equilibria, Econometrica 50 (1982) 863–894.
R. Levin and P. Reiss, Cost reducing and demand creating R&D with spillovers, Rand J. Econ. 19 (1988) 538–556.
F. Lichtenberg, The private R&D investment response to federal design and technical competitions, Am. Econ. Rev. 78 (1988) 550–559.
G. Mailath, Incentive compatibility in signaling games with a continuum of types, Econometrica 55(6) (1987) 1349–1365.
G. Mailath, An abstract two-period game with simultaneous signaling – existence of separating equilibria, J. Econ. Theory 46 (1988) 373–394.
P. Milgrom and J. Roberts, Limit pricing and entry under incomplete information, Econometrica 50 (1982) 443–460.
J. Moad, Why are HP users angry? Datamation 36(24) (1990) 69–71.
M. Mustonen, Strategic R&D investment in future compatibility, in: EURAS Yearbook of Standardization Vol. 3, (Homo Oeconomicus XVII(3)), eds. M. Holler and E. Niskanen (Accedo Verlag, Munich, Germany, 2000).
V. Padmanabhan, S. Rajiv and K. Srinivasan, New products, upgrades and new releases: A rationale for sequential product introduction, INSEAD Working papers 97/06/MKT, Fontainebleau, France (1997).
A. Perrot, Compatibility, networks, and competition: A review of recent advances, Transp. Sci. 27(2) (1993) 62–71.
E. Pugh, Memories that Shaped an Industry: Decisions Leading to IBM System/360 (MIT, Cambridge, MA, 1984).
S. Rosenkranz, Simultaneous choice of process and product innovation, CEPR Discussion papers 1321, London, UK, (1996).
H. Salonen, Quality choice, signaling and moral hazard, Institute of Economics, University of Turku, Series C(32) (1989).
C. Shapiro, Exchange of cost information in an oligopoly model, Rev. Econ. Stud. 53 (1986) 433–446.
C. Shapiro and H. Varian, Information Rules. A Strategic Guide to the Network Economy (Harvard Business School, Boston, USA, 1999).
A.M. Spence, Market Signaling (Harvard University Press, Cambridge, MA, 1974).
K. Srinivasan, Multiple market entry, cost signalling and entry deterrence, Manage. Sci. 37(12) (1991) 1539–1555.
J. Tirole, The Theory of Industrial Organization (MIT, Cambridge, MA, 1988).
H. Wiese, Compatibility, business strategy and market structure – a selective survey, in: Frontiers of Standardization, EURAS Yearbook of Standardization, eds. M. Holler and E. Niskanen (Muenchen, 1997).
Author information
Authors and Affiliations
Corresponding author
Rights and permissions
About this article
Cite this article
Mustonen, M. Signalling cost with investment in compatibility. Netnomics 7, 39–57 (2005). https://doi.org/10.1007/s11066-006-9003-1
Accepted:
Published:
Issue Date:
DOI: https://doi.org/10.1007/s11066-006-9003-1