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Dynamic R&D incentives with network externalities

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Author Info
Cerquera Dussán, Daniel
Abstract

This paper studies the incentives to undertake uncertain R&D initiatives in a dynamic duopoly network industry. It is shown that network externalities positively affect the incentives to invest in R&D. In the model, competition resembles a preemption race and, therefore, market performance implies an overinvestment in R&D in comparison with the social optimum. Moreover, network externalities have an important impact in the dynamic evolution of the industry. Although in the long-run a single firm dominates the market (i.e. wins the race), short-run competition is very fierce and concentrated on neck-and-neck technological configurations. This short-run competition is fiercer and longer, the higher the level of network externalities. Policy measures that increase technological diffusion (i.e. mandatory licensing), increase the level of competition and/or prolong the short-run competition have an important positive impact on consumer welfare and on firms’ R&D incentives.

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Paper provided by ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research in its series ZEW Discussion Papers with number 06-94.

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Date of creation: 2006
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Handle: RePEc:zbw:zewdip:5487

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Keywords: Network externalities Innovation Imperfect Competition Dynamic Games

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Find related papers by JEL classification:
C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
D85 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Network Formation
L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
O31 - Economic Development, Technological Change, and Growth - - Technological Change - - - Innovation and Invention: Processes and Incentives

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