The second essay proposes a model to analyze the compatibility decision problem of network product producers when they deal with markets that are segmented, but interdependent through the network effect. I show that the compatibility decisions of network product producers are influenced by the numbers of consumers who are interested in e-commerce, the consumers’ attitudes to e-commerce, and the number of firms that are planning to join the business of e-commerce. The outcomes of full compatibility or one-way compatibility could occur in the equilibrium. The intuition behind the outcome of one-way compatibility is as follows. Treated as a strategic device, the compatibility decision enables a brand to enhance its competitiveness in the market of web server software at the cost of weakening its competitiveness in the browser market. Therefore, if the network effects on the benefits of a brand’s web server software users are small, and if the network effects on the utilities of its rival’s browser users are large, then the network product producer could choose incompatibility.
In the third essay, I propose a model of vertical differentiation to analyze a firm’s compatibility decision when it confronts competition from a foreign product in the domestic market. I find that the domestic firm’s compatibility choice is determined by the quality gap between the domestic and foreign products as well as the domestic government’s trade policy. In the case of free trade, the domestic firm always makes its product compatible with the foreign product. Under the environment of protectionism, if the quality gap is relatively large (small), then the domestic firm tends to adopt compatibility (incompatibility). This means that the domestic firm’s compatibility choice could be reversed if the domestic government intervenes. Finally, I show that the domestic government may improve the social welfare by implementing the international standard.

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