The Economics of Networks, Compatibility and Standardization: Definitions, Basic Concepts and Insights

This chapter gives a brief introduction into the economics of networks and explains some concepts, insights and definitions, which we refer to in subsequent sections. First, the central concept of network effects is outlined in section 2.1 and it is briefly discussed how these effects potentially affect the performance of competitive markets (section 2.2). In section 2.3, we define the notions of compatibility, standardization and harmonization as they are used in this study. Section 2.4 briefly characterizes the role of switching costs, as far as they are relevant for the study, and attempts to outline their role in network markets. Section 2.5 deals with producers’ incentives for establishing compatibility. Finally, section 2.6 briefly summarizes the results of the relevant empirical studies.