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R&D incentives, compatibility and network externalities

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  • Cerquera Dussán, Daniel

Abstract

This paper analyzes the impact of network externalities on R&D competition between an incumbent and a potential entrant. The analysis shows that the incumbent always invests more than the entrant in the development of higher quality network goods. However, the incumbent exhibits a too low level of investments, while the entrant invests too much in R&D in comparison with the social optimum. In the model entry occurs too often in equilibrium. These inefficiencies are solely due to the presence of network externalities. By choosing compatible network goods, firms do not necessarily reduce the R&D competition intensity.

Suggested Citation

  • Cerquera Dussán, Daniel, 2006. "R&D incentives, compatibility and network externalities," ZEW Discussion Papers 06-093, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  • Handle: RePEc:zbw:zewdip:5486
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    File URL: https://www.econstor.eu/bitstream/10419/24549/1/dp06093.pdf
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    References listed on IDEAS

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    1. Kristiansen, Eirik Gaard, 1996. "R&D in markets with network externalities," International Journal of Industrial Organization, Elsevier, vol. 14(6), pages 769-784, October.
    2. Dasgupta, Partha & Maskin, Eric, 1987. "The Simple Economics of Research Portfolios," Economic Journal, Royal Economic Society, vol. 97(387), pages 581-595, September.
    3. Joseph Farrell & Michael L. Katz, 2005. "Competition Or Predation? Consumer Coordination, Strategic Pricing And Price Floors In Network Markets," Journal of Industrial Economics, Wiley Blackwell, vol. 53(2), pages 203-231, June.
    4. De Bijl, Paul W. J. & Goyal, Sanjeev, 1995. "Technological change in markets with network externalities," International Journal of Industrial Organization, Elsevier, vol. 13(3), pages 307-325, September.
    5. Katz, Michael L & Shapiro, Carl, 1985. "Network Externalities, Competition, and Compatibility," American Economic Review, American Economic Association, vol. 75(3), pages 424-440, June.
    6. Stanley M. Besen & Joseph Farrell, 1994. "Choosing How to Compete: Strategies and Tactics in Standardization," Journal of Economic Perspectives, American Economic Association, vol. 8(2), pages 117-131, Spring.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Network externalities; Innovation; Imperfect Competition;

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • D85 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Network Formation
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • 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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