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Barriers to network-specific innovation

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  • Antoine Martin
  • Michael J. Orlando

Abstract

We consider an environment in which participants make payments over a network and can invest in a technology that reduces the marginal cost of using the network. A network effect results in multiple equilibria; either all agents invest and usage of the network is high or no agents invest and usage of the network is low. The high-usage equilibrium can be implemented through introduction of a coordinator. Under monopoly network ownership, however, fixed costs associated with use of the network-specific technology result in a hold-up problem that implements the low-investment equilibrium. And even where subsidies can avoid such hold-up, optimal monopoly pricing of network usage may avoid investment in the network-specific technology if demand for on-network transactions is sufficiently inelastic.

Suggested Citation

  • Antoine Martin & Michael J. Orlando, 2004. "Barriers to network-specific innovation," Research Working Paper RWP 04-11, Federal Reserve Bank of Kansas City.
    • Handle: RePEc:fip:fedkrw:rwp04-11
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    References listed on IDEAS

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    Cited by:

    1. Tomasz Bernat, 2008. "Market Creation, Development and Barriers: The Case of Polish Mobile Telephony Market," Romanian Economic Journal, Department of International Business and Economics from the Academy of Economic Studies Bucharest, vol. 11(29), pages 153-169, (3).

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    More about this item

    Keywords

    Payment systems;

    JEL classification:

    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • E59 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Other
    • F29 - International Economics - - International Factor Movements and International Business - - - Other

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