In the previous chapter, we analysed the consumers' adoption decision in the presence of network effects. The emphasis was on expectations, on coordination problems and on reinforcing mechanisms. We also studied the provision of network goods in various contexts and showed how prices and capacities are adjusted in the presence of network effects.

In this chapter, we want to explore further the decision making on the supply side of network markets. As a matter of fact, the particular features of demand resulting from network effects drive firms to make additional strategic choices and to develop specific strategic instruments. We start in Section 21.1 by examining firms' choices with respect to compatibility. As the competition between incompatible network goods is likely to lead to a ‘winner-take-all’ situation, firms have first to choose how to compete: choosing compatibility means competing in the market, while choosing incompatibility means competing for the market. We examine under which conditions one or the other situation is likely to emerge as an equilibrium.

When firms choose to compete for the market, they engage in what is called a ‘standards war’. In Section 21.2, we describe and analyse a number of strategic instruments that firms can resort to in order to win such a standards war: building an installed base for preemption, choosing between backward compatibility and performance, and managing consumers' expectations in one's favour.