In markets that exhibit network effects, the presence of digital conversion technologies provides an alternative mechanism to achieve compatibility. This study examines the impact of conversion technologies on market equilibrium in the context of sequential duopoly competition and proprietary technology standards. We analyze this question by departing from the extant literature to endogenize the decision to provide a converter and incorporate explicit negotiations between firms concerning the extent of conversion. We argue that these choices better reflect the environment facing firms in digital goods industries and find that these decisions change some of the established results in the literature. Specifically, we find that unless network effects are very large, the subgame-perfect equilibrium (SPNE) involves firms' agreeing to provide digital converters at a sufficiently low price to all consumers. At this equilibrium, both the entrant and the incumbent are better off because the provision of converters alleviates price competition in the market and leads to both higher product revenues and higher proceeds from the sale of converters. Moreover, under some circumstances, the provision of converters is welfare enhancing. These findings have important implications for research and practice in the adoption of new digital goods as the introduction of conversion technologies can reduce the social costs of standardization without compromising the benefits of network effects.
Given that information technology (IT) security has emerged as an important issue in the last few years, the subject of security information sharing among firms, as a tool to minimize security breaches, has gained the interest of practitioners and academics. To promote the disclosure and sharing of cyber security information among firms, the U.S. federal government has encouraged the establishment of many industry-based Information Sharing and Analysis Centers (ISACs) under Presidential Decision Directive (PDD) 63. Sharing security vulnerabilities and technological solutions related to methods for preventing, detecting, and correcting security breaches is the fundamental goal of the ISACs. However, there are a number of interesting economic issues that will affect the achievement of this goal. Using game theory, we develop an analytical framework to investigate the competitive implications of sharing security information and investments in security technologies. We find that security technology investments and security information sharing act as "strategic complements" in equilibrium. Our results suggest that information sharing is more valuable when product substitutability is higher, implying that such sharing alliances yield greater benefits in more competitive industries. We also highlight that the benefits from such information-sharing alliances increase with the size of the firm. We compare the levels of information sharing and technology investments obtained when firms behave independently (Bertrand-Nash) to those selected by an ISAC, which maximizes social welfare or joint industry profits. Our results help us predict the consequences of establishing organizations such as ISACs, Computer Emergency Response Team (CERT), or InfraGard by the federal government.