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Optimal research effort and product differentiation in network industries

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  • Christian Dahl Winther

    ()
    (School of Economics and Management, University of Aarhus, Denmark)

Abstract

This paper studies the introduction of a new and incompatible technology in a spatial market with network externalities. In competition with an established network the paper investigates how long an entrant optimally should do research before entering the market and what level of product differentiation should be chosen in order to maximize its present value profits. Research time is important as it not only determines the quality of the technology that is introduced; it also has consequences for how successfully the two competing firms build their network of users. First, the paper derives a function characterizing the intertemporal evolution in market shares resulting from the newcomer’s choices. Second, it is shown that each level of technological quality is associated with both a minimum and a maximum level of product differentiation that should be chosen in equilibrium. Third, the entrant’s problem is solved by numerical methods.

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Bibliographic Info

Paper provided by School of Economics and Management, University of Aarhus in its series Economics Working Papers with number 2007-19.

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Length: 29
Date of creation: 20 Nov 2007
Date of revision:
Handle: RePEc:aah:aarhec:2007-19

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Web page: http://www.econ.au.dk/afn/

Related research

Keywords: Network externalities; product differentiation; product introduction; technological change;

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  1. Paul Klemperer & Joseph Farrell, 2006. "Coordination and Lock-In: Competition with Switching Costs and Network Effects," Economics Series Working Papers 2006-W07, University of Oxford, Department of Economics.
  2. Drew Fudenberg & Jean Tirole, 2000. "Customer Poaching and Brand Switching," RAND Journal of Economics, The RAND Corporation, vol. 31(4), pages 634-657, Winter.
  3. Sangin Park, 2004. "Quantitative Analysis of Network Externalities in Competing Technologies: The VCR Case," The Review of Economics and Statistics, MIT Press, vol. 86(4), pages 937-945, November.
  4. Dudey, Marc, 1990. "Competition by Choice: The Effect of Consumer Search on Firm Location Decisions," American Economic Review, American Economic Association, vol. 80(5), pages 1092-1104, December.
  5. Skrzypacz, Andrzej & Mitchell, Matthew F., 2005. "Network Externalities and Long-Run Market Shares," Research Papers 1879, Stanford University, Graduate School of Business.
  6. Thomas Gehrig & Rune Stenbacka, 2004. "Differentiation-Induced Switching Costs and Poaching," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 13(4), pages 635-655, December.
  7. David, Paul A, 1985. "Clio and the Economics of QWERTY," American Economic Review, American Economic Association, vol. 75(2), pages 332-37, May.
  8. Regibeau, Pierre & Rockett, Katherine E., 1996. "The timing of product introduction and the credibility of compatibility decisions," International Journal of Industrial Organization, Elsevier, vol. 14(6), pages 801-823, October.
  9. Stephen E. Margolis & S.J. Liebowitz, . "Path Dependence, Lock-in and History," Working Paper Series 10, North Carolina State University, Department of Economics.
  10. Liebowitz, S J & Margolis, Stephen E, 1990. "The Fable of the Keys," Journal of Law and Economics, University of Chicago Press, vol. 33(1), pages 1-25, April.
  11. Katz, Michael L & Shapiro, Carl, 1992. "Product Introduction with Network Externalities," Journal of Industrial Economics, Wiley Blackwell, vol. 40(1), pages 55-83, March.
  12. Bolton, P. & Brodley, J.F. & Riordan, M.H., 1999. "Predatory Pricing: Strategic Theory and Legal Policy," Discussion Paper 1999-82, Tilburg University, Center for Economic Research.
  13. Eirik Gaard Kristiansen, 1998. "R&D in the Presence of Network Externalities: Timing and Compatibility," RAND Journal of Economics, The RAND Corporation, vol. 29(3), pages 531-547, Autumn.
  14. Katz, Michael L & Shapiro, Carl, 1986. "Technology Adoption in the Presence of Network Externalities," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 822-41, August.
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