R&D Incentives, Compatibility and Network Externalities

27 Pages Posted: 11 Jan 2007

See all articles by Daniel Cerquera

Daniel Cerquera

ZEW – Leibniz Centre for European Economic Research

Date Written: 2006

Abstract

This paper analyzes the impact of network externalities on R&D competition between an incumbent and a potential entrant. The analysis shows that the incumbent always invests more than the entrant in the development of higher quality network goods. However, the incumbent exhibits a too low level of investments, while the entrant invests too much in R&D in comparison with the social optimum. In the model entry occurs too often in equilibrium. These inefficiencies are solely due to the presence of network externalities. By choosing compatible network goods, firms do not necessarily reduce the R&D competition intensity.

Keywords: Network externalities, Innovation, Imperfect Competition

JEL Classification: D21, D85, L13, O31

Suggested Citation

Cerquera, Daniel, R&D Incentives, Compatibility and Network Externalities (2006). ZEW - Center for European Economic Research Discussion Paper No. 06-093, Available at SSRN: https://ssrn.com/abstract=955786 or http://dx.doi.org/10.2139/ssrn.955786

Daniel Cerquera (Contact Author)

ZEW – Leibniz Centre for European Economic Research ( email )

P.O. Box 10 34 43
L 7,1
D-68034 Mannheim, 68034
Germany

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