“The Effect of Compatibility with Price Discrimination” by Jae-Hyon NAHM
Hong Kong University of Science and Technology
One-way compatibility decisions dramatically change the process of transition in standards. This paper analyzes how one-way compatibility decisions affect the adoption of a new technology and the profitability of a monopoly supplier of the new technology. The effect of forward compatibility on the new technology adoption depends on a distribution of consumers’ preferences. We find that backward compatibility always increases the marginal type’s consumer surplus from new-generation hardware, but it can reduce the higher types’ consumer surplus. The effects of backward compatibility on the firm’s profitability differ whether or not the firm can price discriminate among consumers. When the firm cannot price discriminate, the firm’s incentive to provide backward compatibility is too strong in terms of social welfare.