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    The impact of compatibility on innovation in markets with network effects

    Access Status
    Fulltext not available
    Authors
    Bond-Smith, Steven
    Date
    2019
    Type
    Journal Article
    
    Metadata
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    Citation
    Bond-Smith, S. 2019. The impact of compatibility on innovation in markets with network effects. Economics of Innovation and New Technology. 28 (8): pp. 816-840.
    Source Title
    Economics of Innovation and New Technology
    DOI
    10.1080/10438599.2018.1563936
    Additional URLs
    https://bcec.edu.au/assets/2018/12/BCEC-Working-Paper_05_Bond-Smith_The-Impact-of-Compatibility-on-Innovation.pdf
    ISSN
    1043-8599
    Faculty
    Faculty of Business and Law
    School
    Bankwest-Curtin Economics Centre
    Remarks

    Originally published as: Bond-Smith, S. 2018. The Impact of Compatibility on Innovation in Markets with Network Effects. Bankwest Curtin Economics Centre, Working Paper Series; 18/05, Perth: Curtin University.

    URI
    http://hdl.handle.net/20.500.11937/76534
    Collection
    • Curtin Research Publications
    Abstract

    © 2019 Informa UK Limited, trading as Taylor & Francis Group. This article analyses the relationship between compatibility and innovation in markets with network effects using a model of competition with endogenous R&D, commercialization and compatibility. Compatibility is a mutual decision between firms and demand is partially dependent on overall consumption across compatible networks. Incumbent acquisition of an innovation or profit from entry provides entrepreneurs with an incentive for developing technological improvements and entrepreneurs receive greater returns if larger incumbents offer compatibility with their installed base. But for sufficiently weak network effects a large incumbent increases demand for its own product by denying compatibility to rivals. As a result, a credible threat of incompatibility reduces the entrepreneur's reserve to sell an innovation, but can also increase offers from smaller incumbents to acquire the innovation if it also avoids an incompatibility response from a larger incumbent. In response, entrepreneurs adjust their research effort in order to target a favourable compatibility regime that maximizes profit from entry or offers to acquire the innovation from incumbents. This leads to a complex relationship between the strength of network effects, innovation incentives, the entrepreneur's ambition for improvement and potentially disrupting the compatibility regime.

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