Information Economics and Policy 11 (1999) 209–227 www.elsevier.nl / locate / econbase Partial compatibility with network externalities and double purchase a b c, * Andre de Palma , Luc Leruth , Pierre Regibeau a University of Cergy-Pontoise, Cergy-Pontoise, France b University of Liege, Liege, Belgium c Institut d’ Analisi Economica, CSIC, Campus UAB, 08193 Bellaterra, Spain Received 17 December 1998; accepted 22 January 1999 Abstract We analyze an industry where two firms sell a good which generates a positive network externality whose value varies across consumers. The firms make product design decisions which determine the degree of compatibility of their goods before competing in quantities. However, consumers can always reap the benefits of compatibility by joining both networks. We show that such ‘double purchases’ drastically affect the nature of the product market equilibrium as well as the compatibility choices made by the firms. While the equilibrium level of compatibility chosen by the firms depends on the degree of consensus required to increase standardization, it tends to be higher than the social optimum.  1999 Elsevier Science B.V. All rights reserved. Keywords: Compatibility; Network externalities; Standardization JEL Classification: L1 1. Introduction Many goods are characterized by the fact that their value to an individual increases with the number of consumers who purchase a similar product. Such goods are said to generate (positive) network externalities. The size of the network externalities enjoyed by consumers is often positively related to the degree of * Corresponding author. Tel.: 134-93-5806612; fax: 134-93-5801452. E-mail address: regibeau@cc.uab.es (P. Regibeau) 0167-6245 / 99 / $ – see front matter  1999 Elsevier Science B.V. All rights reserved. PII: S0167-6245(99)00006-2