Signalling cost with investment in compatibility

  • Mikko Mustonen

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.


vertical compatibility R&D cost signalling 

JEL subject classification

L15 D82 L13 


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Copyright information

© Springer Science+Business Media, Inc. 2006

Authors and Affiliations

  1. 1.Department of EconomicsHelsinki School of EconomicsHelsinkiFinland

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