Installed Base and Compatibility

A good is often more valuable to any user, the more others use compatible goods. We show that this effects may inhibit innovation. If an installed base exists and transitions to a new standard must be gradual, early adopters bear a disproportionate share of transient incompatibility costs. This can cause  ”excess inertia.” The installed base, however, is “stranded” if the standard is adopted: this may create “excess momentum.” These dynamic effects have strategic implications.