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Adoption of network technologies in the presence of converters

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Abstract:

In many high-tech industries, the emergence of new digital technologies allows companies to develop converters to overcome technology incompatibility. In this paper, we analyze the effects of converter introduction on the adoption process of competing, incompatible technologies in the presence of network externalities. Converter introduction may accelerate, extend or reverse the technology lock-in process. We determine which conversion options are profitable for weak as well as for dominant incumbents, depending on the timing of converter introduction and the degrees of conversion. We find that the optimal strategy for weak incumbents is to introduce full one-way converters early. For dominant incumbents, the optimal conversion option is to provide two-way converters with partial compatibility for the users of the competing network at a later introduction time. We illustrate our analytical results with numerical examples.

Keywords: compatibility; consumer choice; converter; network externality; standards war; technology adoption

Document Type: Research Article

DOI: http://dx.doi.org/10.1080/10438590701663701

Affiliations: 1: Ecole Polytechnique Federale de Lausanne (EPFL), College of Management of Technology, Chair of Technology & Operations Management (TOM), Lausanne, Switzerland,IMD - International Institute for Management Development, Lausanne, Switzerland 2: Ecole Polytechnique Federale de Lausanne (EPFL), College of Management of Technology, Chair of Technology & Operations Management (TOM), Lausanne, Switzerland

Publication date: January 1, 2009

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