Network effects, Compatibility and the Environment : The Case of Hydrogen Powered Cars
AbstractThe paper addresses the problem of entry barriers for a new technology – hydrogen powered cars or cars with fuel cell engines – if the network of its filling stations is missing or thin. We use Hotelling's model of product differentiation to characterize a situation where an incumbent firm produces the old technology, compatible with the existing network of filling stations, and an entrant, who cannot use this network for its products. We assume that the entrant has to invest in remodeling existing filling stations for making them compatible. This, however, raises his costs. In the intertemporal setting of our model, the Hotelling pricing rule for exhaustible resources encourages the entrant to invest in compatibility because the price of gasoline will rise in the long run to the price of the backstop technology - fuel cells. Depending on the cost of compatibility, our model indicates three possible outcomes. Either, the costs of compatibility are too high and governmental support is required. Or the incumbent bears losses in initial periods by waiting for profits in later periods when full compatibility of the network is reached. Or the entrant benefits from the fact that the price of oil reaches the price of the backstop technology (full cells) rather soon.
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Bibliographic InfoPaper provided by Institut fuer Volkswirtschaftslehre und Statistik, Abteilung fuer Volkswirtschaftslehre in its series Discussion Papers with number 613.
Date of creation: 2004
Date of revision:
Find related papers by JEL classification:
- Q42 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Alternative Energy Sources
- L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
- L62 - Industrial Organization - - Industry Studies: Manufacturing - - - Automobiles; Other Transportation Equipment
- L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
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