RDin Markets with Network Externalities

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. This research has benefited from a FCAR grant. We thank Gamal Atallah, Armel Jacques, Corinne Langinier, Nicolas Marceau, Pierre−Thomas Léger, Bruno Versaevel and participants at University of Sherbrooke seminar, 2000 Soci\'et\'e Canadienne de Sciences Economiques and 2001 Canadian Economics Aassociation for insightful comments. C. Boivin, University of Sherbrooke, Quebec, Canada, J1K 2R1, and D. Vencatachellum, HEC−Montreal, 3000 Cote−Ste−Catherine Montreal, Quebec, Canada, H3T 2A7. Corresponding author: D. Vencatachellum, Email: [email protected]. Citation: Boivin, Caroline and Désiré Vencatachellum, (2002) "RDin Markets with Network Externalities." Economics Bulletin, Vol. 12, No. 9 pp. 1−8 Submitted: April 7, 2002. Accepted: August 26, 2002. URL: http://www.economicsbulletin.com/2002/volume12/EB−02L00002A.pdf