Economic Theory Seminar Series - Guofu Tan (University of Southern California)

Title:  A network approach to interoperability by Jinglei Huang, Guofu Tan, Tat-How Teh and Junjie Zhou

Abstract: We study how interoperability, modeled as a weighted network of connections among competing platforms with user externalities, affects equilibrium prices and welfare. By characterizing equilibrium prices as functions of the eigenvalues of the interoperability network, we derive optimal network configurations. Industry‑wide full interoperability maximizes joint surplus and is also platform-optimal. In contrast, coalitional interoperability does not maximize total surplus but can be consumer‑optimal when user externalities are sufficiently strong. This arises from the endogenous formation of strong demand complementarities among coalition partners and intensified competition across coalitions. When user externalities are weak, the price effects of interoperability are bounded relative to the direct user‑benefit effect, implying that industry‑wide full interoperability is Pareto‑optimal.  For the case of four platforms, we fully characterize the set of feasible combinations of industry profit and consumer surplus and identify the associated Pareto frontiers. Overall, the welfare effects of interoperability depend critically on both the strength of user externalities and the structure of interoperability within the industry.