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RDin Markets with Network Externalities

By Caroline Boivin, Désiré Vencatachellum and Université De Montréal


We study how network externalities affect research and development (Rinvestments by a non−cooperative duopoly that offers compatible products. We find that multiple RDequilibria may arise when network externalities are non linear in the number of consumers. The lowest RDequilibrium corresponds to the case where network externalities are absent. However, even in the presence of network externalities, firms may be trapped in a low−RDequilibrium where output, and therefore consumers ' valuation of the network size, is low. We derive the conditions under which the highest−RD equilibrium Pareto dominates

Year: 2011
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