The effect of a compatibilizer on the breakup and coalescence of droplets in flowing polymer blends was analyzed. The analysis was based on theories developed in the literature for low molecular weight emulsions containing a surfactant. Analysis of the stepwise and transient breakup mechanisms led to the conclusion that the effect of a compatibilizer on these mechanisms is qualitatively different. The compatibilizer effect depends on the rate of its migration on the interface and between the interface and bulk phase. The presence of a compatibilizer suppresses coalescence of droplets due to the decrease in the interfacial tension and mobility of the interface. The importance of the compatibilizer effect increases with decreasing ratio of the viscosities of the dispersed phase and matrix.