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Monopoly R&D and Compatibility Decisions in Network Industries

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  • Jong-Hee Hahn

    ()
    (School of Economics, Yonsei University)

  • Jin-Hyuk Kim

Abstract

In network industries, we often observe frequent upgrades of existing products as well as delayed introductions of new products. In order to explain these contrasting phenomena, this paper examines a durable-good monopolist's incentive for R&D in- vestment in new product development in a market with network effects. We show that if the network effect is strong the monopolist underinvests in R&D compared to the commitment level, whereas overinvestment occurs when the network effect is weak. The monopolist also chooses full intergenerational compatibility between products. We then extend the analysis to the cases of potential entry and successive innovations, and examine how the results change in these extensions.

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File URL: ftp://repec.yonsei.ac.kr/repec/yon/wpaper/2012rwp-43.pdf
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Bibliographic Info

Paper provided by Yonsei University, Yonsei Economics Research Institute in its series Working papers with number 2012rwp-43.

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Length: 36 pages
Date of creation: Oct 2012
Date of revision:
Handle: RePEc:yon:wpaper:rwp-201243

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Keywords: Planned Obsolescence; Network Effects; Vaporware;

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  1. Choi, J.P., 1991. "Network Externality, Compatibility Choice, and Planned Obsolescence," Discussion Papers 1991_67, Columbia University, Department of Economics.
  2. Heiko A. Gerlach, 2004. "Announcement, Entry, and Preemption When Consumers Have Switching Costs," RAND Journal of Economics, The RAND Corporation, vol. 35(1), pages 184-202, Spring.
  3. Swan, Peter L, 1970. "Durability of Consumption Goods," American Economic Review, American Economic Association, vol. 60(5), pages 884-94, December.
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  7. 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.
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  9. Miao, Chun-Hui, 2008. "Tying, Compatibility and Planned Obsolescence," MPRA Paper 13523, University Library of Munich, Germany.
  10. Paul A. Grout & In-Uck Park, 2005. "Competitive Planned Obsolescence," RAND Journal of Economics, The RAND Corporation, vol. 36(3), pages 596-612, Autumn.
  11. Marco A. Haan, 2003. "Vaporware as a Means of Entry Deterrence," Journal of Industrial Economics, Wiley Blackwell, vol. 51(3), pages 345-358, 09.
  12. Coase, Ronald H, 1972. "Durability and Monopoly," Journal of Law and Economics, University of Chicago Press, vol. 15(1), pages 143-49, April.
  13. Bulow, Jeremy I, 1982. "Durable-Goods Monopolists," Journal of Political Economy, University of Chicago Press, vol. 90(2), pages 314-32, April.
  14. Jae Nahm, 2004. "Durable-Goods Monopoly with Endogenous Innovation," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 13(2), pages 303-319, 06.
  15. Arthur Fishman & Rafael Rob, 2000. "Product Innovation by a Durable-Good Monpoly," RAND Journal of Economics, The RAND Corporation, vol. 31(2), pages 237-252, Summer.
  16. Mason, Robin, 2000. "Network externalities and the Coase conjecture," European Economic Review, Elsevier, vol. 44(10), pages 1981-1992, December.
  17. 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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