This paper explores the economics of systems markets, where products generate value when combined with others. Examples include hardware and software, automobiles and repair services, and fax machines and communication protocols. These systems are characterized by network effects, where the value of a system increases with the number of users. The paper discusses three key issues: expectations, coordination, and compatibility. Expectations are crucial as buyers must anticipate future component availability, prices, and quality. Coordination is necessary for firms to align investments and ensure compatibility, which can be challenging due to the need for standardization and the potential for incompatibility between systems. Compatibility refers to the ability of components to work together, and achieving it often involves trade-offs between product variety and innovation. The paper also examines how network effects influence market outcomes, leading to potential inefficiencies. In markets with network effects, there is a tendency toward standardization, which can result in "tipping" where one system dominates. This can lead to suboptimal outcomes if the dominant system is not the socially optimal one. The paper discusses how firms can influence market outcomes through strategies such as pricing, vertical integration, and sunk investments. It also considers the role of institutions in achieving compatibility, including standardization and contracts. The paper highlights the importance of compatibility in systems markets, noting that it can enhance variety and reduce costs. However, compatibility can also lead to increased competition and potential inefficiencies. The paper concludes that understanding the dynamics of systems markets is essential for policymakers and firms seeking to navigate the complexities of network effects and compatibility.This paper explores the economics of systems markets, where products generate value when combined with others. Examples include hardware and software, automobiles and repair services, and fax machines and communication protocols. These systems are characterized by network effects, where the value of a system increases with the number of users. The paper discusses three key issues: expectations, coordination, and compatibility. Expectations are crucial as buyers must anticipate future component availability, prices, and quality. Coordination is necessary for firms to align investments and ensure compatibility, which can be challenging due to the need for standardization and the potential for incompatibility between systems. Compatibility refers to the ability of components to work together, and achieving it often involves trade-offs between product variety and innovation. The paper also examines how network effects influence market outcomes, leading to potential inefficiencies. In markets with network effects, there is a tendency toward standardization, which can result in "tipping" where one system dominates. This can lead to suboptimal outcomes if the dominant system is not the socially optimal one. The paper discusses how firms can influence market outcomes through strategies such as pricing, vertical integration, and sunk investments. It also considers the role of institutions in achieving compatibility, including standardization and contracts. The paper highlights the importance of compatibility in systems markets, noting that it can enhance variety and reduce costs. However, compatibility can also lead to increased competition and potential inefficiencies. The paper concludes that understanding the dynamics of systems markets is essential for policymakers and firms seeking to navigate the complexities of network effects and compatibility.