Strategic Delegation with Network Externality and Product Compatibility

Abstract

We investigate the effects of network externality and product compatibility on strategic delegation under price competition in duopoly. We extend the Hoernig (2012) to the case in which product compatibility is endogenously determined and is built into network effects. When the spillover effect for network size depends on the rival’s choice of product compatibility, perfect compatibility is a dominant strategy for each manager. Thus, endogenizing product compatibility excludes the equilibrium of Hoernig (2012) who assumes no compatibility between products. In equilibrium, firm owners require their managers to be more aggressive than profit maximizer if network externality is sufficiently strong but not too strong.