R&D in markets with network externalities

This paper studies the consequences of network externalities on R&D rivalry between an incumbent firm and a potential entrant. In the model, all differences between the R&D projects chosen in market equilibrium and the socially best projects are solely due to network externalities. From a welfare perspective, the incumbent chooses a too risky and the entrant a too certain R&D project. Rothschild and Stiglitz's mean preserving spread criterion is used as a measure of risk. Adoption of a new standard is more likely in equilibrium than in the social optimum.