Barriers to network-specific innovation
AbstractWe examine incentives for network-specific investment and the implications for network governance. We model an environment in which participants that make payments over a network 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 network usage is high or no agents invest and network usage is low. When commitment is feasible, the high-use equilibrium can be implemented; however, when commitment is infeasible, fixed costs associated with use of the network-specific technology result in a holdup problem that implements the low-investment equilibrium. Thus, governance structures necessary to achieve commitment will be preferred to those necessary merely to achieve coordination. For example, mutual ownership by network users may emerge where users face risk of ex post renegotiation. Such a governance structure will also be sufficient to avoid the network effect.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Federal Reserve Bank of New York in its series Staff Reports with number 221.
Date of creation: 2005
Date of revision:
Other versions of this item:
- NEP-ALL-2005-11-05 (All new papers)
- NEP-COM-2005-11-05 (Industrial Competition)
- NEP-INO-2005-11-05 (Innovation)
- NEP-MIC-2005-11-05 (Microeconomics)
- NEP-NET-2005-11-05 (Network Economics)
- NEP-SOC-2005-11-05 (Social Norms & Social Capital)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Julian Wright, 2001.
"The Determinants of Optimal Interchange Fees in Payment Systems,"
- Julian Wright, 2004. "The Determinants of Optimal Interchange Fees in Payment Systems," Journal of Industrial Economics, Wiley Blackwell, vol. 52(1), pages 1-26, 03.
- Klein, Benjamin, 1988. "Vertical Integration as Organizational Ownership: The Fisher Body-General Motors Relationship Revisited," Journal of Law, Economics and Organization, Oxford University Press, vol. 4(1), pages 199-213, Spring.
- Schiff, Aaron, 2003. "Open and closed systems of two-sided networks," Information Economics and Policy, Elsevier, vol. 15(4), pages 425-442, December.
- Jean-Charles Rochet Author-Email:email@example.com Author-Workplace-Name: IDEI, University of Toulouse & Jean Tirole Author-Email: firstname.lastname@example.org Author-Workplace-Name: IDEI, University of Toulouse, 2006.
"Two-Sided Markets: A Progress Report,"
RAND Journal of Economics,
The RAND Corporation, vol. 37(3), pages 645-667, Autumn.
- Rochet, Jean-Charles & Tirole, Jean, 2005. "Two-Sided Markets : A Progress Report," IDEI Working Papers 275, Institut d'Économie Industrielle (IDEI), Toulouse.
- Rochet, Jean-Charles & Tirole, Jean, 2006. "Two-Sided Markets: A Progress Report," Open Access publications from University of Toulouse 1 Capitole http://neeo.univ-tlse1.fr, University of Toulouse 1 Capitole.
- Katz, Michael L & Shapiro, Carl, 1985. "Network Externalities, Competition, and Compatibility," American Economic Review, American Economic Association, vol. 75(3), pages 424-40, June.
- Cardillo, Matthew & Martin, Antoine & Orland0, Michael, 2004. "Innovation on networks: Coordination, governance, and the case of VISA," Journal of Financial Transformation, Capco Institute, vol. 12, pages 104-106.
- Jean-Charles Rochet & Jean Tirole, 2003.
"Platform Competition in Two-Sided Markets,"
Journal of the European Economic Association,
MIT Press, vol. 1(4), pages 990-1029, 06.
- Jean-Charles Rochet & Jean Triole, 2002. "Platform Competition in Two Sided Markets," FMG Discussion Papers dp409, Financial Markets Group.
- Rochet, Jean-Charles & Tirole, Jean, 2003. "Platform Competition in Two-Sided Markets," Open Access publications from University of Toulouse 1 Capitole http://neeo.univ-tlse1.fr, University of Toulouse 1 Capitole.
- Rochet, Jean-Charles & Tirole, Jean, 2003. "Platform Competition in Two-Sided Markets," IDEI Working Papers 152, Institut d'Économie Industrielle (IDEI), Toulouse.
- Joseph Farrell & Garth Saloner, 1984.
"Standardization, Compatibility and Innovation,"
345, Massachusetts Institute of Technology (MIT), Department of Economics.
- Bengt Holmstrom, 1981.
"Moral Hazard in Teams,"
471, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Klepper, Steven, 1996. "Entry, Exit, Growth, and Innovation over the Product Life Cycle," American Economic Review, American Economic Association, vol. 86(3), pages 562-83, June.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Amy Farber).
If references are entirely missing, you can add them using this form.