The impact of compatibility on innovation in markets with network effects
© 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 decisio...
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| Format: | Journal Article |
| Language: | English |
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ROUTLEDGE JOURNALS, TAYLOR & FRANCIS LTD
2019
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| Online Access: | https://bcec.edu.au/assets/2018/12/BCEC-Working-Paper_05_Bond-Smith_The-Impact-of-Compatibility-on-Innovation.pdf http://hdl.handle.net/20.500.11937/76534 |
| _version_ | 1848763711136727040 |
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| author | Bond-Smith, Steven |
| author_facet | Bond-Smith, Steven |
| author_sort | Bond-Smith, Steven |
| building | Curtin Institutional Repository |
| collection | Online Access |
| description | © 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. |
| first_indexed | 2025-11-14T11:07:48Z |
| format | Journal Article |
| id | curtin-20.500.11937-76534 |
| institution | Curtin University Malaysia |
| institution_category | Local University |
| language | English |
| last_indexed | 2025-11-14T11:07:48Z |
| publishDate | 2019 |
| publisher | ROUTLEDGE JOURNALS, TAYLOR & FRANCIS LTD |
| recordtype | eprints |
| repository_type | Digital Repository |
| spelling | curtin-20.500.11937-765342019-10-17T04:02:17Z The impact of compatibility on innovation in markets with network effects Bond-Smith, Steven Social Sciences Economics Business & Economics Network effects innovation compatibility COMPETITION ECONOMICS GROWTH © 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. 2019 Journal Article http://hdl.handle.net/20.500.11937/76534 10.1080/10438599.2018.1563936 English https://bcec.edu.au/assets/2018/12/BCEC-Working-Paper_05_Bond-Smith_The-Impact-of-Compatibility-on-Innovation.pdf ROUTLEDGE JOURNALS, TAYLOR & FRANCIS LTD restricted |
| spellingShingle | Social Sciences Economics Business & Economics Network effects innovation compatibility COMPETITION ECONOMICS GROWTH Bond-Smith, Steven The impact of compatibility on innovation in markets with network effects |
| title | The impact of compatibility on innovation in markets with network effects |
| title_full | The impact of compatibility on innovation in markets with network effects |
| title_fullStr | The impact of compatibility on innovation in markets with network effects |
| title_full_unstemmed | The impact of compatibility on innovation in markets with network effects |
| title_short | The impact of compatibility on innovation in markets with network effects |
| title_sort | impact of compatibility on innovation in markets with network effects |
| topic | Social Sciences Economics Business & Economics Network effects innovation compatibility COMPETITION ECONOMICS GROWTH |
| url | https://bcec.edu.au/assets/2018/12/BCEC-Working-Paper_05_Bond-Smith_The-Impact-of-Compatibility-on-Innovation.pdf http://hdl.handle.net/20.500.11937/76534 |