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

Tsuyoshi Toshimitsu ()
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Tsuyoshi Toshimitsu: School of Economics, Kwansei Gakuin University

No 293, Discussion Paper Series from 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.

Keywords: Network externality; Connectivity; Compatibility; Horizontal interoperability; R&D competition; Market coverage; Consumer expectations (search for similar items in EconPapers)
JEL-codes: D43 L13 L15 L31 L32 (search for similar items in EconPapers)
Pages: 41 pages
Date: 2025-05
New Economics Papers: this item is included in nep-com and nep-mic
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