Abstract: By employing dynamic game methods, price competition and compatibility decisions between domestic and foreign firms in an industry with network externalities when tariff is levied are focused on. The results show that network externality intensifies price competition while the compatibility weakens the competition. The tariff as a substitute for quality differences determines the market advantage position between domestic and foreign firms. Hence, suitable tariff is helpful for both the development of domestic firm and the market entry of foreign firm. Furthermore, the marginal compatibility costs determine the optimal compatibility degree. These results would be useful for the decisions making of firms and government.

Key words: network externality, tariff, quality difference, compatibility