Innovation of Network Goods: A Non-Innovating Firm Will Gain
20 Pages Posted: 27 May 2002
Date Written: March 2002
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: Suggested Citation