Compatibility Choices, Switching Costs and Data Portability: On the Role of the Non-Negative Pricing Constraint

Résumé

We study mix-and-match compatibility choices of firms selling complementary products in a dynamic setting. In contrast to what happens in a static setting where symmetric firms choose compatibility (Matutes and Régibeau, 1988), when consumers face significant switching costs and firms can poach them by making behavior-based price discrimination, symmetric firms choose incompatibility to soften future competition. Even if this tends to harm consumers, incompatibility can increase welfare by reducing excessive switching. Data portability, by reducing switching costs, induces the firms to choose compatibility more often but, given a compatibility regime, benefits consumers only if the non-negative pricing constraint binds.