R&D Expenditure and Entry Deterrence in Presence of Network Externality

22 Pages Posted: 7 Jul 2004

See all articles by Sumit Sarkar

Sumit Sarkar

XLRI - Xavier School of Management

Abstract

The existing literature suggests that an incumbent monopolist supplier of a network good can successfully deter entry by increasing its installed base, which plays a role similar to that of the commitment value of investment in capacity. In this paper, we consider a market with network externality, where the consumers' utility not only depends on the network size but also on the technological quality of the product. We show that when the installed base of the incumbent fails to play its preemptive role to deter entry, the monopolist can deter entry, strategically by revealing its R&D expenditure on upgrading the product. The result is independent of whether the R&D project is, ex-post, successful or not. Such entry deterrence is welfare reducing.

Keywords: Network externality, entry deterrence, compatibility, installed base, limit pricing, R&D

JEL Classification: L13, L15, D43

Suggested Citation

Sarkar, Sumit, R&D Expenditure and Entry Deterrence in Presence of Network Externality. Available at SSRN: https://ssrn.com/abstract=561384 or http://dx.doi.org/10.2139/ssrn.561384

Sumit Sarkar (Contact Author)

XLRI - Xavier School of Management ( email )

C. H. Area (East)
Jamshedpur, Jharkhand 831001
India

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