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Compatibility, Interoperability and Market Power in Upgrade Markets

James J. Anton and Gary Biglaiser

Economics of Innovation and New Technology, Vol. 19(4): 373-385, June 2010

Abstract: We examine 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. We argue that control of compatibility and interoperability does not allow an
incumbent seller to charge a price premium relative to when such control is absent and, consequently, neither is a necessary source of market power. (JEL Codes D42, L15, O32)