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

Author

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  • Tsuyoshi Toshimitsu

    (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).

Suggested Citation

  • Tsuyoshi Toshimitsu, 2024. "The impact of compatibility on incentives to innovate and consumer benefits in a network industry," Discussion Paper Series 274, School of Economics, Kwansei Gakuin University.
    • Handle: RePEc:kgu:wpaper:274
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    More about this item

    Keywords

    innovation; network compatibility; a fulfilled expectation; cost-reducing R&D; Cournot duopoly;
    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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