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The Impact of Compatibility on Incentives to Innovate and Consumer Benefits in a Network Industry

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  • Tsuyoshi Toshimitsu

    (Kwansei Gakuin University)

Abstract

Compatibility and connectivity are essential elements in a digital economy. We use the degree of network compatibility as a measure of market competitiveness. That is, an increase in network compatibility possibly reduces market competitive pressure. We consider the impact of compatibility on profit incentives to innovate and consumer benefits in a digital market. We mainly demonstrate that if the degree of network externalities is larger than a half, as compatibility increases, the profit incentives to innovate first decreases, then increases (i.e., a U-shaped function of compatibility); conversely, the consumer benefits first increase, then decrease (i.e., an inverse U-shaped function of compatibility). Otherwise, the profit incentives decrease while the consumer benefits increase, monotonically.

Suggested Citation

  • Tsuyoshi Toshimitsu, 2024. "The Impact of Compatibility on Incentives to Innovate and Consumer Benefits in a Network Industry," Journal of Industry, Competition and Trade, Springer, vol. 24(1), pages 1-16, December.
    • Handle: RePEc:kap:jincot:v:24:y:2024:i:1:d:10.1007_s10842-024-00435-4
    DOI: 10.1007/s10842-024-00435-4
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    References listed on IDEAS

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    1. Shrivastav, Sumit, 2021. "Network compatibility, intensity of competition and process R&D: A generalization," Mathematical Social Sciences, Elsevier, vol. 109(C), pages 152-163.
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    3. Philippe Aghion & Nick Bloom & Richard Blundell & Rachel Griffith & Peter Howitt, 2005. "Competition and Innovation: an Inverted-U Relationship," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 120(2), pages 701-728.
    4. Katz, Michael L & Shapiro, Carl, 1985. "Network Externalities, Competition, and Compatibility," American Economic Review, American Economic Association, vol. 75(3), pages 424-440, June.
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    More about this item

    Keywords

    Innovation; Network compatibility; A fulfilled expectation; Cost-reducing R&D; Cournot duopoly; Profit incentive; Consumer benefit;
    All these keywords.

    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
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives

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