R&amp;D in the Presence of Network Externalities: Timing and Compatibility

Kristiansen, Eirik Gaard

doi:10.2307/2556103

Cited by 65 publications

(32 citation statements)

References 9 publications

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“…A pioneer has an incentive to boost the speed of growth in order to capture a market share that will increase the utility of future and current customers, possibly situating the new product as the eventual standard. Hence, firms may want to invest early in R&D and deliberately introduce new incompatible technologies early on (Kristiansen, 1998), or they may introduce low pricing to deter the entry of a competitor (Fudenberg & Tirole, 2000).…”

Section: Competitive Considerations and The Chilling Effectmentioning

confidence: 99%

The chilling effects of network externalities

Goldenberg

Libai

Muller

2010

International Journal of Research in Marketing

191

132

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Conventional wisdom suggests that network effects should drive faster market growth due to the bandwagon effect. However, as we show, network externalities may also create an initial slowdown effect on growth because potential customers wait for early adopters, who provide them with more utility, before they adopt. In this study, we explore the financial implications of network externalities by taking the entire network process into account. Using an agent-based as well as an aggregate-level model, and separating network effects from word of mouth, we find that network externalities have a substantial chilling effect on the net present value associated with new products. This effect may occur not only in a competitive framework, such as a competing standards scenario, but also in the absence of competition. Drawing on the collective action literature in order to relate network effects to individual consumer threshold levels, we find that the chilling effect is stronger with a small variability in the threshold distribution, and is especially affected by the process early on in the product life cycle. We also find a "hockey stick" growth pattern by empirically examining the growth of fax machines, CB radios, CD players, DVD players, and cellular services.

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Section: Competitive Considerations and The Chilling Effectmentioning

confidence: 99%

The chilling effects of network externalities

Goldenberg

Libai

Muller

2010

International Journal of Research in Marketing

191

132

View full text Add to dashboard Cite

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“…These results are solely due to the presence of network externalities and are in contrast with the results reported in Kristiansen (1996). Fourth, by choosing to produce compatible products, firms do not necessarily reduce the R&D competition intensity as has been suggested for example in Katz and Ordover (1990) and Kristiansen (1998). Moreover, for high cost of innovation 4 Some exceptions that will be discussed below include Kristiansen (1996Kristiansen ( , 1998 Kristiansen (1996) assumes a mean-preserving spread criterion in the R&D technology.…”

mentioning

confidence: 89%

“…Fourth, by choosing to produce compatible products, firms do not necessarily reduce the R&D competition intensity as has been suggested for example in Katz and Ordover (1990) and Kristiansen (1998). Moreover, for high cost of innovation 4 Some exceptions that will be discussed below include Kristiansen (1996Kristiansen ( , 1998 Kristiansen (1996) assumes a mean-preserving spread criterion in the R&D technology. That is, even though riskier projects exhibit higher returns and lower probability of success, the expected value of all R&D projects is the same.…”

mentioning

confidence: 99%

R&D Incentives, Compatibility and Network Externalities

Cerquera

2006

SSRN Journal

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Die Dis cus si on Pape rs die nen einer mög lichst schnel len Ver brei tung von neue ren For schungs arbei ten des ZEW. Die Bei trä ge lie gen in allei ni ger Ver ant wor tung der Auto ren und stel len nicht not wen di ger wei se die Mei nung des ZEW dar.Dis cus si on Papers are inten ded to make results of ZEW research prompt ly avai la ble to other eco no mists in order to encou ra ge dis cus si on and sug gesti ons for revi si ons. The aut hors are sole ly respon si ble for the con tents which do not neces sa ri ly repre sent the opi ni on of the ZEW.Download this ZEW Discussion Paper from our ftp server:ftp://ftp.zew.de/pub/zew-docs/dp/dp06093.pdf Non-technical summaryAn industry exhibits network externalities when the benefit that consumers enjoy from purchasing one or several of its goods depends on the number of other consumers that use the same and/or compatible products. For the firms in those sectors (e.g. telecommunications, consumer electronics, operating systems, etc.), the presence of network externalities implies that the attractiveness of their products is a function of their quality-adjusted prices and the potential benefit attached to their expected network sizes.Several studies have shown how pricing considerations, as well as compatibility, entry and investment decisions are affected by the presence of network externalities. Moreover, due to the presence of these externalities, firms in network industries might even follow very different rules from those observed in traditional industries. While the producer of a new product in a conventional industry tends to place it on the market early, to differentiate the good as much as possible, to protect it from imitation and to charge high prices, successful producers of network goods have often done the opposite.This paper analyzes how network externalities influence industry Research and Development (R&D) incentives when two network technologies compete. The paper focuses on the levels of R&D investments, the social efficiency of those efforts and the role of networks' compatibility.The paper presents four main results. First, for low cost of innovation entry does not occur at all and for high cost of innovation, entry occurs with positive probability. Low cost of innovation implies that through investments the incumbent firm is able to preempt the entrant. Second, when entry is possible, the incumbent invests always more than the entrant and, therefore, there is a high probability that the incumbent maintains its monopoly position. This result implies that, even though the incumbent has an advantage to keep monopolizing the market, he is forced to innovate given the threat of entry. Third, from a welfare perspective, the incumbent invests too little and the entrant invests too much given the existence of locked-in consumers. These results are solely due to the presence of network externalities. Fourth, by choosing to produce compatible products, firms do not necessarily reduce the R&D competition intensity as has been suggested in the literature....

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“…2 Our paper is also closely related to the literature on R&D incentives and compatibility policy in network industries. In particular, our paper relates to Kristiansen (1998) and Cabral and Salant (2010), which both provide mechanisms for why compatibility can reduce innovation incentives. Kristiansen (1998) studies R&D rivalry between firms and finds that network effects can cause firms to introduce incompatible technologies too early.…”

Section: Introductionmentioning

confidence: 99%

“…In particular, our paper relates to Kristiansen (1998) and Cabral and Salant (2010), which both provide mechanisms for why compatibility can reduce innovation incentives. Kristiansen (1998) studies R&D rivalry between firms and finds that network effects can cause firms to introduce incompatible technologies too early. Firms can mutually agree on compatibility to reduce the incentives to introduce technologies too early.…”

Section: Introductionmentioning

confidence: 99%

Acquisitions, Entry and Innovation in Network Industries

2011

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may Acquisitions, Entry and Innovation in Network IndustriesPehr-Johan Norbäck, Lars Persson and Joacim Tåg Abstract Why do so many high-priced acquisitions of entrepreneurial firms take place in network industries? We develop a theory of commercialization (entry or sale) in network industries showing that high equilibrium acquisition prices are driven by the incumbents' desire to prevent rivals from acquiring innovative entrepreneurial firms. This preemptive motive becomes more important when there is an increase in network effects. A consequence is higher innovation incentives under an acquisition relative to entry. A policy enforcing strict compatibility leads to more entry, but can be counterproductive by reducing bidding competition, thereby also reducing acquisition prices and innovation incentives.

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R&D in the Presence of Network Externalities: Timing and Compatibility

Cited by 65 publications

References 9 publications

The chilling effects of network externalities

The chilling effects of network externalities

R&D Incentives, Compatibility and Network Externalities

Acquisitions, Entry and Innovation in Network Industries

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