Compatibility Investments in Duopoly With Demand Side Spillovers Under Different Degrees of Cooperation

This paper examines the effects of different degrees of cooperation on firms' incentives to undertake interbrand compatibility investments, which benefit the competitor indirectly via an increase of its mass market demand. We find that cooperation in compatibility investments while preserving competition on the product market gives second-best welfare for all feasible values of the spillover parameter. For large spillover effects cartelization in compatibility investments and on the product market is welfare improving compared with pure competitive behavior. Furthermore, we examine the effects of an "open standardization policy" which increases the level of the spillover parameter