The Value of Compatibility to a Tied-Good Market

Abstract

What are the implications of adopting a proprietary standard in a durable-component market? In the digital camera and lens market, proprietary lens mounts tie products within the brand: I demonstrate that this tying generates consumer switching costs and hurts both firm profits and consumer surplus. I use detailed individual-level product adoption data to empirically measure consumer switching costs and trace out the fraction of these costs driven by the purchasing of tied, durable goods. I estimate a structural model of dynamic consumer demand and forward-looking firms setting committed long-run equilibrium prices. My results show that lens investments create high consumer switching costs, which case significant frictions for consumers, yet lead to competitive markets with lower prices. As a result, introducing compatibility – a universal standard across firms – will benefit all market participants: firm profit increases by 16-39%, the dominant firm benefits less, and average consumer surplus increases by 10%.