Network Connectivity and R&D Competition in a Hotelling Model: Market Coverage, Consumer Expectations, and Asymmetric Firms

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

No 309, Discussion Paper Series from School of Economics, Kwansei Gakuin University

Abstract: Network connectivity is an important function in network industries. Based on the framework of a Hotelling model, we consider the impact of connectivity between network goods on incentives to innovate product R&D activities and profits. To explore the problems, we focus on the following three perspectives: market coverage (i.e., full and partial coverage), consumer expectations (i.e., rational and active expectations), and asymmetric firms (i.e., a high- and low-quality firm). Our findings are as follows. In the full market coverage case, the impact of connectivity on product R&D activities and profits depends on the type of consumer expectations and the difference in the quality of the firms. However, in the partial market coverage case, as connectivity improves, product R&D activities and profits increase, irrespective of the type of consumer expectations and the difference in the quality of the firms.

Keywords: Network externality; Connectivity; Compatibility; Horizontal interoperability; R&D competition; Market coverage; Consumers' expectations; Firms' heterogeneity; Quality (search for similar items in EconPapers)
JEL-codes: D43 L13 L15 L31 L32 (search for similar items in EconPapers)
Pages: 50 pages
Date: 2026-04
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