Software Producers ’ Choice on Compatibility with Hardware

Software products do not provide consumption benefit unless a hardware product is installed in advance. In the market with this software – hardware relationship, a software producer sometimes finds that it is profitable to make its product compatible with only a certain hardware product. This incompatibility decision is considered as a vertical foreclosure. The conditions under which vertical merger and foreclosure occur in equilibrium are analyzed. We find that the welfare reducing foreclosure arises in equilibrium even without the credible commitment of foreclosure decision