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The Impact of Compatibility on Incentives to Innovate in a Network Goods Market: A Duopoly Case

Author

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  • Tsuyoshi Toshimitsu

    (School of Economics, Kwansei Gakuin University)

Abstract

Based on a horizontal product differentiation model associated with network externalities, we consider the impact of compatibility (interconnectivity) on incentives to innovate in a network goods industry in the cases of Cournot quantity and Bertrand price duopoly. We demonstrate that the effect of compatibility on incentives to innovate depends on network externalities and product substitutability. In particular, an increase in the degree of compatibility increases the incentives to innovate if the degree of network externalities is relatively large and if the degree of product differentiation is sufficiently large, irrespective of the mode of competition. Then, we then examine the same problem in a Hotelling-type unit-linear market and show that an increase in the degree of compatibility reduces the incentives to innovate.

Suggested Citation

  • Tsuyoshi Toshimitsu, 2023. "The Impact of Compatibility on Incentives to Innovate in a Network Goods Market: A Duopoly Case," Discussion Paper Series 253, School of Economics, Kwansei Gakuin University.
    • Handle: RePEc:kgu:wpaper:253
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    References listed on IDEAS

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    1. Shrivastav, Sumit, 2021. "Network compatibility, intensity of competition and process R&D: A generalization," Mathematical Social Sciences, Elsevier, vol. 109(C), pages 152-163.
    2. Naskar, Mili & Pal, Rupayan, 2020. "Network externalities and process R&D: A Cournot–Bertrand comparison," Mathematical Social Sciences, Elsevier, vol. 103(C), pages 51-58.
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    More about this item

    Keywords

    innovation; network externality; compatibility; a fulfilled expectation; cost-reducing;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives

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