Till Requate, Kiel University. "Optimal network structure under expected technological change"
ESOP seminar. Till Requate is a professor for innovation economics, competition policy, and new institutional economics at Kiel University. He will present the paper: "Optimal network structure under expected technological change".
In this paper we consider goods which incur indirect network effects, through infrastructure. In our model a new network technology competes with a mature network technology, which may induce environmental damage. Consumers initially face higher costs using the new technology, but through technological progress the new technology can leapfrog the conventional one with a certain probability. The network owners have to decide about network size before the success of technological progress is revealed. We find that that, depending on parameters, notably the probability of R\&D success, it can be optimal to build up only one large network or two small networks. We show that all socially optimal network allocations are also equilibria of a decentralized economy, but that multiple equilibria can exist, some of them being not socially optimal. Finally, we suggest a mechanism for auctioning off network licenses that helps decentralizing socially optimal network structures. We extend that model to the case of two competing technologies engaging in R&D.