R&D Incentives, Compatibility and Network Externalities
27 Pages Posted: 11 Jan 2007
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: Suggested Citation
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