ABSTRACT:
The integration of artificial intelligence (AI) with deep-tech products has been a transformative force across various industries. The synergy between AI and innovation continues to drive the development of cutting-edge solutions that shape the future of technology and business. This study examines the firm’s strategic decision of whether to make its innovative AI product compatible with its rival’s incumbent product. A compatible strategy allows the firm to generate more sales of the deep-tech product. In contrast, adopting an incompatible strategy enables the firm to increase sales of its incumbent product by attracting consumers who seek compatibility with the firm’s deep-tech product. The compatibility decision, aimed at maximizing the firm’s overall profitability from both the deep-tech and incumbent products, hinges critically on factors such as the compatibility utility of using an incumbent product that is compatible with the deep-tech product, the marginal production cost of the deep-tech product, and network effects exhibited by the products. The firm is inclined to adopt the compatible strategy when the deep-tech product has a low marginal production cost and the compatibility utility is also low. When network effects are weaker than the misfit cost, it promotes a compatible strategy. Stronger network effects than the misfit cost lead to one of the two firms monopolizing the incumbent market when consumers are rational, eliminating the need for a compatibility decision. However, if consumers’ rationality is bounded, both firms coexist in the incumbent product market, and the compatibility decision depends on factors influencing consumers’ expectations of the incumbent products’ demands.
Key words and phrases: Compatibility strategy, network effects, duopolistic competition, deep-tech products, online competition