Network externalities and process R&D: A Cournot-Bertrand comparison

Abstract

This paper examines the implication of the nature of competition in a market with network externalities on strategic investment in process R&D by firms. It shows that network externalities have a positive effect on process R&D, regardless of the nature of product market competition; but, that effect is larger under Bertrand competition than under Cournot competition. If network externalities are sufficiently strong, regardless of the degree of product differentiation, Bertrand firms have a stronger incentive for process R&D than Cournot firms. Otherwise, if network externalities are not sufficiently strong, the higher the degree of product differentiation, the greater is the possibility of Bertrand R&D to be higher than Cournot R&D.