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Process innovation, application compatibility, and welfare

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  • Maruyama, Masayoshi
  • Zennyo, Yusuke

Abstract

We analyze a model of cost-reducing R&D and compatibility decisions by two platforms. After an exogenous improvement in the efficiency of R&D, each platform has a heightened incentive to make its software incompatible with the rival’s hardware device to avoid being dominated in the hardware market. This can lead to an inefficient market structure. The increase in the efficiency of R&D not only has a positive direct effect of reducing costs through process innovations but also a negative indirect effect through the change of the compatibility decisions. We show that due to this indirect effect, an increased efficiency of R&D can be harmful to the profit of a large platform and harmful to social welfare.

Suggested Citation

  • Maruyama, Masayoshi & Zennyo, Yusuke, 2017. "Process innovation, application compatibility, and welfare," Information Economics and Policy, Elsevier, vol. 40(C), pages 1-12.
  • Handle: RePEc:eee:iepoli:v:40:y:2017:i:c:p:1-12
    DOI: 10.1016/j.infoecopol.2017.04.005
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    References listed on IDEAS

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    More about this item

    Keywords

    R&D investment; Process innovation; Compatibility; Market dominance; Social welfare;

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure

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