TECHNOLOGICAL-CHANGE IN MARKETS WITH NETWORK EXTERNALITIES

This paper examines a duopoly model in which firms have to decide simultaneously on product innovation and compatibility of the successor technologies with the established industry standard. We show that in markets with homogeneous consumers there may be a bias towards a new standard (excess momentum), despite the presence of network externalities and an installed base. In markets with heterogeneous consumers, sufficient conditions for the coexistence of two incompatible networks are derived and it is shown that both excess momentum and excess inertia are possible.