Network externalities, product compatibility and process innovation

This article augments d’Aspremont and Jacquemin’s [1988. “Cooperative Noncooperative R&D in Duopoly with Spillovers.” American Economic Review 78: 1133–1137; 1990. Spillovers: Erratum.” 80: 641–642] cost-reducing duopoly by introducing network externalities product compatibility then considers the investment decision stage. For standard non-network industries, received literature has robustly shown that non-cooperative game is, without technological spill-over, a prisoner’s dilemma investing firms (there is conflict between self-interest mutual benefit of R&D), deadlock no R&D) only whether extent spill-over sufficiently high. Network challenge this result. In fact, outcomes antithetical to those emerging industry do exist. Under symmetric full compatibility, also effects. incompatibility, can be irrespective spill-over. From policy perspective, shows subsidies or taxes used as social welfare maximising tools depending on externality degree compatibility. The work focuses Cournot rivalry, but results hold for price-setting (Bertrand rivalry).