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Innovation of Network Goods: A Non-Innovating Firm Will Gain

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Author Info
Glazer, Amihai
Kanniainen, Vesa
Mustonen, Mikko

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Abstract

We consider duopolists innovating and producing a good subject to network externalities, so that the reservation price of a consumer increases with aggregate consumption. The post-innovation network consists of two compatible sub-networks, with increased network valuation of the new product. When the non-innovating firm enjoys a larger profit than when neither firm innovates, free-riding on the winner's network as a public good arises. With such a network spillover, duopolists may underinvest in innovation.

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Publisher Info
Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number CESifo Working Paper No. 692.

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Date of creation: 2002
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Handle: RePEc:ces:ceswps:_692

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Related research
Keywords: network goods; free riding; innovation; telecommunications;

Find related papers by JEL classification:
D21 - Microeconomics - - Production and Organizations - - - Firm Behavior
D62 - Microeconomics - - Welfare Economics - - - Externalities
L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
L63 - Industrial Organization - - Industry Studies: Manufacturing - - - Microelectronics; Computers; Communications Equipment

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    Other versions:
  4. Bental, Benjamin & Spiegel, Menahem, 1995. "Network Competition, Product Quality, and Market Coverage in the Presence of Network Externalities," Journal of Industrial Economics, Blackwell Publishing, vol. 43(2), pages 197-208, June. [Downloadable!] (restricted)
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  6. Dasgupta, Partha & Stiglitz, Joseph, 1980. "Industrial Structure and the Nature of Innovative Activity," Economic Journal, Royal Economic Society, vol. 90(358), pages 266-93, June. [Downloadable!] (restricted)
  7. 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. [Downloadable!] (restricted)
  8. Kindleberger, Charles P, 1983. "Standards as Public, Collective and Private Goods," Kyklos, Blackwell Publishing, vol. 36(3), pages 377-96.
  9. Economides, Nicholas, 1996. "The economics of networks," International Journal of Industrial Organization, Elsevier, vol. 14(6), pages 673-699, October. [Downloadable!] (restricted)
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  10. de Palma, Andre & Leruth, Luc, 1996. "Variable willingness to pay for network externalities with strategic standardization decisions," European Journal of Political Economy, Elsevier, vol. 12(2), pages 235-251, September. [Downloadable!] (restricted)
  11. Katz, Michael L & Shapiro, Carl, 1992. "Product Introduction with Network Externalities," Journal of Industrial Economics, Blackwell Publishing, vol. 40(1), pages 55-83, March. [Downloadable!] (restricted)
  12. David M. Kreps & Jose A. Scheinkman, 1983. "Quantity Precommitment and Bertrand Competition Yield Cournot Outcomes," Bell Journal of Economics, The RAND Corporation, vol. 14(2), pages 326-337, Autumn. [Downloadable!] (restricted)
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  1. Pehr-Johan Norbäck & Lars Persson & Joacim Tåg, 2008. "Entrepreneurial Innovations in Network Industries," Working Papers 08-02, NET Institute, revised Sep 2008. [Downloadable!]
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