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 larger positive effect on process R&D under Bertrand competition than that 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. Further, Bertrand R&D can be higher than Cournot R&D even in the presence of weak network externalities. These results hold true regardless of whether networks are incompatible or imperfectly compatible.
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