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R&D incentives, compatibility and network externalities

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  • Cerquera Dussán, Daniel
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    Abstract

    This paper analyzes the impact of network externalities on R&D competition between an incumbent and a potential entrant. The analysis shows that the incumbent always invests more than the entrant in the development of higher quality network goods. However, the incumbent exhibits a too low level of investments, while the entrant invests too much in R&D in comparison with the social optimum. In the model entry occurs too often in equilibrium. These inefficiencies are solely due to the presence of network externalities. By choosing compatible network goods, firms do not necessarily reduce the R&D competition intensity. --

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    Bibliographic Info

    Paper provided by ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research in its series ZEW Discussion Papers with number 06-93.

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    Date of creation: 2006
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    Handle: RePEc:zbw:zewdip:5486

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    Keywords: Network externalities; Innovation; Imperfect Competition;

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    1. Stanley M. Besen & Joseph Farrell, 1994. "Choosing How to Compete: Strategies and Tactics in Standardization," Journal of Economic Perspectives, American Economic Association, vol. 8(2), pages 117-131, Spring.
    2. Dasgupta, Partha & Maskin, Eric, 1987. "The Simple Economics of Research Portfolios," Economic Journal, Royal Economic Society, vol. 97(387), pages 581-95, September.
    3. Joseph Farrell & Michael L. Katz, 2005. "Competition Or Predation? Consumer Coordination, Strategic Pricing And Price Floors In Network Markets," Journal of Industrial Economics, Wiley Blackwell, vol. 53(2), pages 203-231, 06.
    4. De Bijl, P.W.J. & Goyal, S., 1992. "Technological Change in Markets with Network Externalities," Papers 9233, Tilburg - Center for Economic Research.
    5. Kristiansen, Eirik Gaard, 1996. "R&D in markets with network externalities," International Journal of Industrial Organization, Elsevier, vol. 14(6), pages 769-784, October.
    6. Katz, Michael L & Shapiro, Carl, 1985. "Network Externalities, Competition, and Compatibility," American Economic Review, American Economic Association, vol. 75(3), pages 424-40, June.
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