Dynamic R&D Incentives with Network Externalities

44 Pages Posted: 10 Jan 2007 Last revised: 22 Jul 2012

See all articles by Daniel Cerquera

Daniel Cerquera

ZEW – Leibniz Centre for European Economic Research

Date Written: 2006

Abstract

This paper studies the incentives to undertake uncertain R&D initiatives in a dynamic duopoly network industry. It is shown that network externalities positively affect the incentives to invest in R&D. In the model, competition resembles a preemption race and, therefore, market performance implies an over-investment in R&D in comparison with the social optimum. Moreover, network externalities have an important impact in the dynamic evolution of the industry. Although in the long-run a single firm dominates the market (i.e. wins the race), short-run competition is very fierce and concentrated on neck-and-neck technological configurations. This short-run competition is fiercer and longer, the higher the level of network externalities. Policy measures that increase technological diffusion (i.e. mandatory licensing), increase the level of competition and/or prolong the short-run competition have an important positive impact on consumer welfare and on firms' R&D incentives.

Keywords: Network externalities, Innovation, Imperfect Competition, Dynamic Games

JEL Classification: L13, D85, O31, C73

Suggested Citation

Cerquera, Daniel, Dynamic R&D Incentives with Network Externalities (2006). ZEW - Centre for European Economic Research Discussion Paper No. 06-094, Available at SSRN: https://ssrn.com/abstract=956048 or http://dx.doi.org/10.2139/ssrn.956048

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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