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Network Connectivity and R&D Competition in a Hotelling Model: The Role of Market Coverage and Consumer Expectations

Author

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  • Tsuyoshi Toshimitsu

    (School of Economics, Kwansei Gakuin University)

Abstract

Network connectivity, compatibility, and horizontal interoperability are important functions in network industries. Based on the framework of a Hotelling model, we consider the impact of connectivity between network goods on incentives to innovate and profits. We focus on the role of market coverage (i.e., full and partial coverage) and consumer expectations (i.e., rational and active expectations). We demonstrate that in the case of full market coverage, as the degree of connectivity increases, research and development (R&D) activities decrease, but profits increase. Then, relaxing the assumption of market coverage, we demonstrate that in the case of partial market coverage, as the degree of connectivity increases, R&D activities and profits increase. Furthermore, regarding the full market coverage case, we examine the case that the formation of consumer expectations is active and demonstrate that an improvement in connectivity does not affect R&D activities, but increases profits.

Suggested Citation

  • Tsuyoshi Toshimitsu, 2025. "Network Connectivity and R&D Competition in a Hotelling Model: The Role of Market Coverage and Consumer Expectations," Discussion Paper Series 293, School of Economics, Kwansei Gakuin University.
    • Handle: RePEc:kgu:wpaper:293
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    References listed on IDEAS

    as
    1. Joseph Farrell & Garth Saloner, 1985. "Standardization, Compatibility, and Innovation," RAND Journal of Economics, The RAND Corporation, vol. 16(1), pages 70-83, Spring.
    2. Sjaak Hurkens & Ángel L. López, 2014. "Mobile Termination, Network Externalities and Consumer Expectations," Economic Journal, Royal Economic Society, vol. 124(579), pages 1005-1039, September.
    3. Xavier Vives, 2008. "Innovation And Competitive Pressure," Journal of Industrial Economics, Wiley Blackwell, vol. 56(3), pages 419-469, December.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Network externality; Connectivity; Compatibility; Horizontal interoperability; R&D competition; Market coverage; Consumer expectations;
    All these keywords.

    JEL classification:

    • 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
    • L31 - Industrial Organization - - Nonprofit Organizations and Public Enterprise - - - Nonprofit Institutions; NGOs; Social Entrepreneurship
    • L32 - Industrial Organization - - Nonprofit Organizations and Public Enterprise - - - Public Enterprises; Public-Private Enterprises
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection

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