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Market structure and the timing of technology adoption with network externalities

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  • Choi, Jay Pil
  • Thum, Marcel

Abstract

The paper shows that in the presence of network externalities, consumers adopt conventional technologies too early; the waiting option for a newly emerging technology is not exercised enough. This problem is aggravated when the new technology is provided by a single producer with market power because any positive value created via waiting by current consumers will be ex post appropriated by the monopolist. Therefore, the monopolist´s power to extract surplus operates against his own interests in this dynamic setting. The paper also shows how the producer of a new technology can partially overcome the problem of too little waiting by using licensing as a commitment device.
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Suggested Citation

  • Choi, Jay Pil & Thum, Marcel, 1998. "Market structure and the timing of technology adoption with network externalities," European Economic Review, Elsevier, vol. 42(2), pages 225-244, February.
  • Handle: RePEc:eee:eecrev:v:42:y:1998:i:2:p:225-244
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    1. Farrell, Joseph & Saloner, Garth, 1986. "Installed Base and Compatibility: Innovation, Product Preannouncements, and Predation," American Economic Review, American Economic Association, vol. 76(5), pages 940-955, December.
    2. Joseph Farrell & Nancy T. Gallini, 1988. "Second-Sourcing as a Commitment: Monopoly Incentives to Attract Competition," The Quarterly Journal of Economics, Oxford University Press, vol. 103(4), pages 673-694.
    3. 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 822-841, August.
    4. Katz, Michael L & Shapiro, Carl, 1992. "Product Introduction with Network Externalities," Journal of Industrial Economics, Wiley Blackwell, vol. 40(1), pages 55-83, March.
    5. Choi, Jay Pil, 1994. "Network Externality, Compatibility Choice, and Planned Obsolescence," Journal of Industrial Economics, Wiley Blackwell, vol. 42(2), pages 167-182, June.
    6. Jay Pil Choi, 1994. "Irreversible Choice of Uncertain Technologies with Network Externalities," RAND Journal of Economics, The RAND Corporation, vol. 25(3), pages 382-401, Autumn.
    7. Andrea Shepard, 1987. "Licensing to Enhance Demand for New Technologies," RAND Journal of Economics, The RAND Corporation, vol. 18(3), pages 360-368, Autumn.
    8. Michael Waldman, 1993. "A New Perspective on Planned Obsolescence," The Quarterly Journal of Economics, Oxford University Press, vol. 108(1), pages 273-283.
    9. Thum, Marcel, 1994. "Network externalities, technological progress, and the competition of market contracts," International Journal of Industrial Organization, Elsevier, vol. 12(2), pages 269-289, June.
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    Cited by:

    1. Jay Choi & Marcel Thum, 2009. "The economics of politically-connected firms," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 16(5), pages 605-620, October.
    2. Eirik Kristiansen & Marcel Thum, 1997. "R&D incentives in compatible networks," Journal of Economics, Springer, pages 55-78.
    3. Hans-Werner Sinn, 1999. "Inflation and Welfare: Comment on Robert Lucas," NBER Working Papers 6979, National Bureau of Economic Research, Inc.
    4. Liikanen, Jukka & Stoneman, Paul & Toivanen, Otto, 2004. "Intergenerational effects in the diffusion of new technology: the case of mobile phones," International Journal of Industrial Organization, Elsevier, vol. 22(8-9), pages 1137-1154, November.
    5. Wei Jin & ZhongXiang Zhang, 2015. "Levelling the Playing Field: On the Missing Role of Network Externality in Designing Renewable Energy Technology Deployment Policies," Working Papers 2015.76, Fondazione Eni Enrico Mattei.
    6. A. Mahathi & Rupayan Pal & Vinay Ramani, 2016. "Competition, strategic delegation and delay in technology adoption," Economics of Innovation and New Technology, Taylor & Francis Journals, vol. 25(2), pages 143-171, March.
    7. Ewald Scherm & Christian Maaß, 2006. "Zum Stellenwert der Netzwerkökonomik in der Strategie-/Marketingforschung —Eine Analyse empirischer Untersuchungen," Metrika: International Journal for Theoretical and Applied Statistics, Springer, vol. 17(1), pages 27-46, March.
    8. Alipranti, Maria & Milliou, Chrysovalantou & Petrakis, Emmanuel, 2015. "On vertical relations and the timing of technology adoption," Journal of Economic Behavior & Organization, Elsevier, vol. 120(C), pages 117-129.
    9. Emmann, Carsten H. & Arens, Ludwig & Theuvsen, Ludwig, 2013. "Individual acceptance of the biogas innovation: A structural equation model," Energy Policy, Elsevier, vol. 62(C), pages 372-378.
    10. Kubota, Keiko, 2000. "Trade negotiations in the presence of network externalities," Policy Research Working Paper Series 2317, The World Bank.
    11. Oz Shy, 2011. "A Short Survey of Network Economics," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 38(2), pages 119-149, March.
    12. Sujoy Chakravarty, 2003. "Experimental Evidence on Product Adoption in the Presence of Network Externalities," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 23(3_4), pages 233-254, December.
    13. Kim, Jeong-Yoo, 2002. "Product compatibility as a signal of quality in a market with network externalities," International Journal of Industrial Organization, Elsevier, vol. 20(7), pages 949-964, September.
    14. Maria Alipranti & Chrysovalantou Miliou & Emmanuel Petrakis, 2014. "On Vertical Relations and Technology Adoption Timing," Working Papers 1502, University of Crete, Department of Economics.
    15. Heli Koski & Tobias Kretschmer, 2004. "Survey on Competing in Network Industries: Firm Strategies, Market Outcomes, and Policy Implications," Journal of Industry, Competition and Trade, Springer, vol. 4(1), pages 5-31, March.
    16. Christian Dahl Winther, 2008. "Popularity and Debut," Economics Working Papers 2008-02, Department of Economics and Business Economics, Aarhus University.
    17. Maarten Janssen & Ewa Mendys-Kamphorst, 2007. "Evolution of market shares with repeated purchases and heterogeneous network externalities," Journal of Evolutionary Economics, Springer, vol. 17(5), pages 551-577, October.
    18. Karaca-Mandic, Pinar, 2003. "Network Effects in Technology Adoption: The Case of DVD Players," Department of Economics, Working Paper Series qt3zj05321, Department of Economics, Institute for Business and Economic Research, UC Berkeley.

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