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Exploration and Exploitation in the Presence of Network Externalities

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  • Jongseok Lee

    ()
    (Graduate School of Management, Korea Advanced Institute of Science and Technology, 207-43 Cheongryangri-dong, Dongdaemun-gu, Seoul 190-102, Korea, and Center for Emerging-Technology Assessment, Science and Technology Policy Institute, 395-70 Shindaebang-dong, Tongjak-gu, Seoul 156-714, Korea)

  • Jeho Lee

    ()
    (Graduate School of Management, Korea Advanced Institute of Science and Technology, 207-43 Cheongryangri-dong, Dongdaemun-gu, Seoul 190-102, Korea)

  • Habin Lee

    ()
    (School of Management Information, Paichai University, 439-6 Doma 2-dong, Seo-gu, Taejon, Korea)

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    Abstract

    This paper examines the conditions under which exploration of a new, incompatible technologyis conducive to firm growth in the presence of network externalities. In particular, this study is motivated by the divergent evolutions of the PC and the workstation markets in response to a new technology: reduced instruction set computing (RISC). In the PC market, Intel has developed new microprocessors by maintaining compatibility with the established architecture, whereas it was radically replaced by RISC in the workstation market. History indicates that unlike the PC market, the workstation market consisted of a large number of power users, who are less sensitive to compatibility than ordinary users. Our numerical analysis indicates that the exploration of a new, incompatible technology is more likely to increase the chance of firm growth when there are a substantial number of power users or when a new technology is introduced before an established technology takes off.

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    File URL: http://dx.doi.org/10.1287/mnsc.49.4.553.14417
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    Bibliographic Info

    Article provided by INFORMS in its journal Management Science.

    Volume (Year): 49 (2003)
    Issue (Month): 4 (April)
    Pages: 553-570

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    Handle: RePEc:inm:ormnsc:v:49:y:2003:i:4:p:553-570

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    Related research

    Keywords: Network Externalities; Exploration and Exploitation; Innovation; Technology;

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    Cited by:
    1. O'Reilly, Charles A., III & Tushman, Michael, 2007. "Ambidexterity as a Dynamic Capability: Resolving the Innovator's Dilemma," Research Papers 1963, Stanford University, Graduate School of Business.
    2. Brett Anitra Gilbert & Mika Tatum Kusar, 2006. "The Influence of Geographic Clusters and Knowledge Spillovers on the Product Innovation Activities of New Ventures," Papers on Entrepreneurship, Growth and Public Policy 2006-16, Max Planck Institute of Economics, Entrepreneurship, Growth and Public Policy Group.
    3. Grajek, Michał & Kretschmer, Tobias, 2012. "Identifying critical mass in the global cellular telephony market," International Journal of Industrial Organization, Elsevier, vol. 30(6), pages 496-507.
    4. Lisboa, Ana & Skarmeas, Dionysis & Lages, Carmen, 2011. "Innovative capabilities: Their drivers and effects on current and future performance," Journal of Business Research, Elsevier, vol. 64(11), pages 1157-1161.
    5. Claussen, Jörg & Kretschmer, Tobias & Spengler, Thomas, 2010. "Backward Compatibility to Sustain Market Dominance – Evidence from the US Handheld Video Game Industry," Discussion Papers in Business Administration 11499, University of Munich, Munich School of Management.
    6. Lee, Amy H.I. & Chen, Hsing Hung & Kang, He-Yau, 2011. "A model to analyze strategic products for photovoltaic silicon thin-film solar cell power industry," Renewable and Sustainable Energy Reviews, Elsevier, vol. 15(2), pages 1271-1283, February.
    7. Lee, Jeho & Park, Seung Ho & Ryu, Young & Baik, Yoon-Suk, 2010. "A hidden cost of strategic alliances under Schumpeterian dynamics," Research Policy, Elsevier, vol. 39(2), pages 229-238, March.
    8. Jörg Claussen & Tobias Kretschmer & Thomas Spengler, 2012. "Market Leadership Through Technology - Backward Compatibility in the U.S. Handheld Video Game Industry," CEP Discussion Papers dp1124, Centre for Economic Performance, LSE.
    9. Charles Z. Liu & Chris F. Kemerer & Michael D. Smith, 2007. "Standards Competition In The Presence Of Digital Conversion Technology: An Empirical Analysis Of The Flash Memory Card Market," Working Papers 07-17, NET Institute, revised Sep 2007.
    10. O'Reilly, Charles A., III & Tushman, Michael L., 2013. "Organizational Ambidexterity: Past, Present and Future," Research Papers 2130, Stanford University, Graduate School of Business.

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