The impact of compatibility on incentives to innovate and consumer benefits in a network industry

Tsuyoshi Toshimitsu

No 274, Discussion Paper Series from School of Economics, Kwansei Gakuin University

Abstract: Compatibility and connectivity are essential elements in a network economy. Using the degree of network compatibility as a measure of market competitiveness, we consider the impact of compatibility on profit incentives to innovate in a network goods industry. That is, an increase in the degree of network compatibility possibly reduces market competitive pressure. In addition, we investigate the impact on consumer benefits (i.e., marginal consumer surplus) caused by the innovation. We demonstrate that as the degree of compatibility increases, the profit incentives to innovate first decrease, then increase (i.e., a U-shaped function of compatibility); but, conversely, the consumer benefits first increase, then decrease (i.e., an inverted U-shaped function of compatibility).

Keywords: innovation; network compatibility; a fulfilled expectation; cost-reducing R&D; Cournot duopoly (search for similar items in EconPapers)
JEL-codes: D43 L13 L15 O31 (search for similar items in EconPapers)
Pages: 21 pages
Date: 2024-05
New Economics Papers: this item is included in nep-com, nep-cta, nep-ind and nep-mic
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Persistent link: https://EconPapers.repec.org/RePEc:kgu:wpaper:274

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