Compatibility choice in vertically differentiated technologies

We analyse firms ’ incentives to provide two-way compatibility between two net-work goods with different intrinsic qualities, assuming substitutability between con-verters. We study how the relative importance of vertical differentiation with respect to the network effect influences the price competition as well as the compatibility choice. Indeed, the final degree of compatibility allows firms to manipulate the overall differentiation. Under weak network effect, full compatibility may arise: the low quality firm has higher incentives to offer it in order to prevent the rival from dominating the market. Under strong network effect we observe multiple equilibria for consumers demands. However, in any equilibrium of the full game, coordina-tion takes place on the high quality good as long as it maintains its overall quality dominance. Compatibility is always underprovided from the social point of view