International Journal of Business and Economics Volume 19, No. 1 June, 2020

An Oligopoly Game with Network Effects for Compatible and Incompatible Standards: As Applied to Short and Multimedia Message Services

Porchiung Ben Chou

Martin Tuchman School of Management, New Jersey Institute of Technology, USA

Cesar Bandera

Martin Tuchman School of Management, New Jersey Institute of Technology, USA

Abstract

We develop a game theoretical model to characterize how two oligopoly firms choose the levels of standards compatibility or interoperability in the context of short and multimedia message services (MMS). When the network effect is strong, both firms choose the ratified standards that are completely interoperable, as in the case of short message service (SMS) worldwide. In contrast, when the network effect is weak, as in the case of MMS in the U.S., it is more likely that firms pursue partially incompatible protocols that differ from the ratified standard. Such an equilibrium is similar to the prisoner's dilemma game as the firms reach the inefficient equilibrium. At the same time, when the government intervenes in choosing messaging protocols, it is also possible for the firms to reach the efficient equilibrium, as in the case of MMS in China.

Keywords：Compatible and incompatible standards, interoperability, multimedia message service (MMS), Nash equilibrium, network effect, oligopoly, prisoner's dilemma game, short message services (SMS).

JEL Classifications：D21, D43, D62, L15, L96.

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