Innovation of Network Goods: A Non-Innovating Firm Will Gain

20 Pages Posted: 27 May 2002

See all articles by Amihai Glazer

Amihai Glazer

University of California, Irvine - Department of Economics

Vesa Kanniainen

University of Helsinki - Department of Political and Economic Studies; CESifo (Center for Economic Studies and Ifo Institute)

Mikko Mustonen

University of Helsinki - Department of Political and Economic Studies

Date Written: March 2002

Abstract

We consider duopolists innovating and producing a good that is subject to network externalities, so that the reservation price for a consumer increases with aggregate consumption. The post-innovation network consists of two compatible sub-networks, with increased network valuation of the new product. When the non-innovating firm enjoys a larger profit than when neither firm innovates, free-riding on the winner's network as a public good arises. With such a network spillover, duopolists may underinvest in innovation.

Keywords: Network Goods, Free Riding, Innovation, Telecommunications

JEL Classification: D21, D62, L15, L63

Suggested Citation

Glazer, Amihai and Kanniainen, Vesa and Mustonen, Mikko, Innovation of Network Goods: A Non-Innovating Firm Will Gain (March 2002). CESifo Working Paper Series No. 692. Available at SSRN: https://ssrn.com/abstract=310543

Amihai Glazer

University of California, Irvine - Department of Economics ( email )

3151 Social Science Plaza
Irvine, CA 92697-5100
United States
949-854-6563 (Phone)
949-824-2182 (Fax)

Vesa Kanniainen (Contact Author)

University of Helsinki - Department of Political and Economic Studies ( email )

P.O. Box 54
FIN-00014 Helsinki
Finland
+358-0-9-1911 (Phone)
+358-0-191-8877 (Fax)

HOME PAGE: http://www.cesifo.de

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

Mikko Mustonen

University of Helsinki - Department of Political and Economic Studies ( email )

P.O. Box 54 (Unioninkatu 37)
FIN-00014
Finland

HOME PAGE: http://www.hut.fi/~vmustone/

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