Durable Goods, Innovation and Network Externalities
32 Pages Posted: 17 May 2009
Date Written: 2007
We develop a model of R&D competition between an incumbent and a potential entrant with network externalities and durable goods. We show that the threat of entry eliminates the commitment problem that an incumbent may face in its R&D decision due to the goods' durability. Moreover, a potential entrant over-invests in R&D and an established incumbent might exhibit higher, equal or lower R&D investments in comparison with the social optimum. In our model, the incumbent's commitment problem and the efficiency of its R&D level are determined by the extent of the network externalities.
Keywords: Network externalities, Durable Goods, Innovation, Imperfect Competition
JEL Classification: D21, D85, L13, O31
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