Innovation, Pricing and Targeting in Networks

Yves Zenou, Fabrizio Panebianco and Thierry Verdier

No 11398, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: Consider a network of firms where a firm T is given the opportunity to innovate a product (first-generation innovation). If successful, this firm can temporarily sell this innovation to her direct neighbors because this will give her access to a larger market. However, if her direct neighbors innovate themselves on top of firm T's innovation (second-generation innovations), then firm T loses the right to sell her initial innovation to the remaining firms in the market. We analyze this game where each firm (T and her direct neighbors) has to decide at which price they want to sell their innovation. We show that the optimal price policy of each firm depends on the level of property rights protection, the position of firm T in the network, her degree and the size of the market. We then analyze the welfare implications of our model where the planner that maximizes total welfare has to decide which firm to target. We show that it depends on the level of property rights protection and on the network structure in a non-trivial way.

Keywords: Networks; Diffusion centrality; Targets; Innovation (search for similar items in EconPapers)
JEL-codes: D85 L1 Z13 (search for similar items in EconPapers)
Date: 2016-07
New Economics Papers: this item is included in nep-com, nep-ind, nep-ino and nep-net
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