Innovation of Network Goods: A Non-Innovating Firm Will Gain

Amihai Glazer, Vesa Kanniainen and Mikko Mustonen

No CESifo Working Paper No. 692, CESifo Working Paper Series from CESifo Group Munich

Abstract: We consider duopolists innovating and producing a good subject to network externalities, so that the reservation price of a consumer increases with aggregate consumption. The post-innovation network consists of two compatible sub-networks, with increased network valuation of the new product. When the non-innovating firm enjoys a larger profit than when neither firm innovates, free-riding on the winner's network as a public good arises. With such a network spillover, duopolists may underinvest in innovation.

Keywords: network goods; free riding; innovation; telecommunications (search for similar items in EconPapers)
JEL-codes: D21 D62 L15 L63 (search for similar items in EconPapers)
Date: 2002
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