Business Intelligence

Compatibility, Interoperability, And Market Power In Upgrade Markets

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Executive Summary

This paper examines the market power of a seller who repeatedly offers upgraded versions of a product. In the case of pure monopoly, the seller also controls compatibility across versions. In the case of an entrant who offers an upgrade, the incumbent seller also controls subsequent interoperability across versions. A common concern in upgrade markets is that incumbent control of compatibility and interoperability leads to high prices and market power for the seller. This paper examines the added value of such control in terms of the ability of an incumbent firm to raise prices relative to their levels when such control is lacking.

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