Network Externalities, Cost Functions and Standardization

Abstract

In market structures with network externalities, it is often asserted that there is a natural tendency toward standardization. Several incompatible systems only survive, if the decision to produce these goods is a part of an intertemporal strategy. In this paper it is argued that in­compatible products may survive in static models. The model developed in this paper is close to the one used by Katz and Shapiro (1985). I develop a simple multi-product oligopoly in which the demand for one of these commodities increases with the number of agents consuming this good and in which cost functions are explicitly introduced. Apart from the issues of standardization, I also explicitly address the problems related to the exis­tence and the uniqueness of a rational expectation Cournot equilibrium