An R&D Game Model With Network Externality

Net externality denotes a phenomenon like this:the value of a product to consumers increases with increasing number of other users. There are many kinds of products in information industry that have this feature, such as phone, fax, Internet, computer software and hardware. The network externality plays a significant role in the rational decision-making of consumers. Therefore, it greatly affects a company’s approach for market competence and compatibility, as well as it research and development (R&D) strategy. Meanwhile, the products with net externalities generally have a marked feature of frequent product update knowledge flow, and R&D spillover. Cooperative R&Ds are relatively common. It is necessary to study the R&D game problem with net externality, in order to provide a basis for enterprises to choose the R&D strategy, and for government to develop science and technology policies.Generally, most scholars pay attention to the form of R&D model, while net externality is just a term to the value of product. The differences between the R&D in network externality industry and the general R&D are not reflected in their models. A new viewpoint was recently proposed, pointing out that the effect of R&D in net externality industry tends to be quality-improving, rather than cost-reducing. The same study also established an R&D decision model with one firm facing R&D opportunity in a duopolistic industry. In Chapter3of our paper, we generalized this decision model into a game model. We assume the two firms both have R&D opportunity, and build a three-stage game model. Then we analyze the limitation of this model. Firstly, this model does not take full account of the differences among different consumer groups under the Lock-in effect. Secondly, this model, which is established on the basis of the Hotelling model, inherits the shortcoming of lack of demand elasticity of the latter.In Chapter4of our paper, according to the different elasticity of demand, we separate the consumers into two groups:old users who have already possessed antiquated products, and new users who purchase developed products. It is pointed out that because of the "Lock-in effect", the old consumers are locked in, which brings about an unneglectable difference on demand function among old and new consumers. Then we establish a model with partial elastic demand, and obtain the optimum R&D strategy and income. Further analysis of the equilibrium shows more results as follows:compared with non-cooperative R&D, enterprises prefer cooperative R&D; the enhancement of net externality can increase the R&D investment and profit, so can the enhancement of spillover effect; at last, in favor of improving the social welfare, R&D is supposed to be encouraged.