We analyse the subgame perfect equilibrium of a four stage game in a model of vertical product di erentiation, where the consumer's evaluation of a product depends on its inherent quality and on its network's size. First, two rms choose their product's inherent quality. Then they may m utually agree on providing an adapter before competing in prices. Finally, consumers buy. We nd that, despite the high quality rm's preference for incompatibility, an adapter is always provided in equilibrium. Social welfare is greater than without an adapter and can beimproved by regulating compatibility only in those cases where qualities are di erentiated too much.

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We compare investments in generating capacities of an integrated monopolist with the aggregate investments of two vertically integrated competing firms. The firms invest in their capacity and fix the retail price while electricity demand is uncertain. The wholesale price is determined in a unit price auction where the firms know the level of demand when they bid their capacities. Total capacities can be larger or smaller with a duopoly than with a monopoly. If the two firms select the Pareto dominant equilibrium, then the retail price is always higher and the social welfare lower in the duopoly case.

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