Dynamic R&D incentives with network externalities

Daniel Cerquera Dussán

No 06-094, ZEW Discussion Papers from ZEW - Leibniz Centre for European Economic Research

Abstract: This paper studies the incentives to undertake uncertain R&D initiatives in a dynamic duopoly network industry. It is shown that network externalities positively affect the incentives to invest in R&D. In the model, competition resembles a preemption race and, therefore, market performance implies an overinvestment in R&D in comparison with the social optimum. Moreover, network externalities have an important impact in the dynamic evolution of the industry. Although in the long-run a single firm dominates the market (i.e. wins the race), short-run competition is very fierce and concentrated on neck-and-neck technological configurations. This short-run competition is fiercer and longer, the higher the level of network externalities. Policy measures that increase technological diffusion (i.e. mandatory licensing), increase the level of competition and/or prolong the short-run competition have an important positive impact on consumer welfare and on firms? R&D incentives.

Keywords: Network externalities; Innovation; Imperfect Competition; Dynamic Games (search for similar items in EconPapers)
JEL-codes: C73 D85 L13 O31 (search for similar items in EconPapers)
Date: 2006
New Economics Papers: this item is included in nep-com, nep-cse, nep-ind, nep-ino, nep-ipr, nep-pr~, nep-mic and nep-net
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:zewdip:5487

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