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Exploration and Exploitation in the Presence of Network Externalities

Author

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  • Jongseok Lee

    (Graduate School of Management, Korea Advanced Institute of Science and Technology, 207-43 Cheongryangri-dong, Dongdaemun-gu, Seoul 190-102, Korea, and Center for Emerging-Technology Assessment, Science and Technology Policy Institute, 395-70 Shindaebang-dong, Tongjak-gu, Seoul 156-714, Korea)

  • Jeho Lee

    (Graduate School of Management, Korea Advanced Institute of Science and Technology, 207-43 Cheongryangri-dong, Dongdaemun-gu, Seoul 190-102, Korea)

  • Habin Lee

    (School of Management Information, Paichai University, 439-6 Doma 2-dong, Seo-gu, Taejon, Korea)

Abstract

This paper examines the conditions under which exploration of a new, incompatible technologyis conducive to firm growth in the presence of network externalities. In particular, this study is motivated by the divergent evolutions of the PC and the workstation markets in response to a new technology: reduced instruction set computing (RISC). In the PC market, Intel has developed new microprocessors by maintaining compatibility with the established architecture, whereas it was radically replaced by RISC in the workstation market. History indicates that unlike the PC market, the workstation market consisted of a large number of power users, who are less sensitive to compatibility than ordinary users. Our numerical analysis indicates that the exploration of a new, incompatible technology is more likely to increase the chance of firm growth when there are a substantial number of power users or when a new technology is introduced before an established technology takes off.

Suggested Citation

  • Jongseok Lee & Jeho Lee & Habin Lee, 2003. "Exploration and Exploitation in the Presence of Network Externalities," Management Science, INFORMS, vol. 49(4), pages 553-570, April.
    • Handle: RePEc:inm:ormnsc:v:49:y:2003:i:4:p:553-570
    DOI: 10.1287/mnsc.49.4.553.14417
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    References listed on IDEAS

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