The Impact of Compatibility on Incentives to Innovate in a Network Goods Market: A Duopoly Case

Tsuyoshi Toshimitsu

No 253, Discussion Paper Series from School of Economics, Kwansei Gakuin University

Abstract: Based on a horizontal product differentiation model associated with network externalities, we consider the impact of compatibility (interconnectivity) on incentives to innovate in a network goods industry in the cases of Cournot quantity and Bertrand price duopoly. We demonstrate that the effect of compatibility on incentives to innovate depends on network externalities and product substitutability. In particular, an increase in the degree of compatibility increases the incentives to innovate if the degree of network externalities is relatively large and if the degree of product differentiation is sufficiently large, irrespective of the mode of competition. Then, we then examine the same problem in a Hotelling-type unit-linear market and show that an increase in the degree of compatibility reduces the incentives to innovate.

Keywords: innovation; network externality; compatibility; a fulfilled expectation; cost-reducing (search for similar items in EconPapers)
JEL-codes: D43 L13 L15 O31 (search for similar items in EconPapers)
Pages: 46 pages
Date: 2023-07
New Economics Papers: this item is included in nep-com, nep-cta, nep-gth, nep-ind, nep-mic and nep-reg
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Persistent link: https://EconPapers.repec.org/RePEc:kgu:wpaper:253

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