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Incentives to innovate, compatibility and efficiency in durable goods markets with network effects
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Athanasopoulos, Thanos (2014) Incentives to innovate, compatibility and efficiency in durable goods markets with network effects. Working Paper. Coventry: University of Warwick. Department of Economics. Warwick economics research papers series (TWERPS), Volume 2014 (Number 1054). (Unpublished)
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Official URL: http://www2.warwick.ac.uk/fac/soc/economics/resear...
Abstract
This paper investigates the relation between firms’R&D incentives and their compatibility decisions regarding durable, imperfectly substitutable network goods in the presence of forward looking consumers. Non drastic product innovation is sequential and both an initially dominant firm and a smaller rival are potential inventors. For sufficiently innovative future products, our first key result is that the dominant firm invests more when there is compatibility and voluntarily decides to supply interoperability information. This happens as the probability that he is the only inventor increases, allowing him to enjoy a higher expected future profit that outweighs the current lost revenue. For economies whose initial market size is considerably large, the rival also demands compatibility but this is no longer true in industries with a relatively smaller number of existing consumers. For less innovative new versions, the dominant firm rejects compatibility and there is a cutoff in network externalities below which he invests more when there is incompatibility. Regarding welfare, we find that a laissez faire Competition Law with respect to the IPR holders is socially preferable.
| Item Type: | Working or Discussion Paper (Working Paper) | ||||
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| Subjects: | H Social Sciences > HF Commerce | ||||
| Divisions: | Faculty of Social Sciences > Economics | ||||
| Library of Congress Subject Headings (LCSH): | New products -- Econometric models | ||||
| Series Name: | Warwick economics research papers series (TWERPS) | ||||
| Publisher: | University of Warwick. Department of Economics | ||||
| Place of Publication: | Coventry | ||||
| Official Date: | October 2014 | ||||
| Dates: |
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| Volume: | Volume 2014 | ||||
| Number: | Number 1054 | ||||
| Number of Pages: | 32 | ||||
| Status: | Not Peer Reviewed | ||||
| Publication Status: | Unpublished | ||||
| Access rights to Published version: | Open Access |
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