Efficient Upgrading in Durable Network Goods: Is Commitment Always Good?

In this article I explore an incumbent monopolistís incentives to upgrade in the future his durable network product in the presence of overlapping generations of customers and a potential entrant who may also sell a version of the same quality. When the incumbent has commitment power and entry cannot be deterred, he decides to withhold the upgrade when network e§ects are weak, as strategic complementarity between the competitorsíintertemporal pricing decisions allows him to charge su¢ ciently patient forward-looking consumers more in the present market. On the other hand, he commits to upgrade when network e§ects are strong, as there is strategic substitutability between Örmsíprices. Regarding welfare, the frequency of new products is not socially optimal when the quality improvement is negligible and smaller than their adoption cost. I Önd that both potential or actual competition and the incumbentís commitment power are sources of ine¢ ciency.

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Working or Discussion Paper
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WERP 1006

 Record created 2018-04-03, last modified 2020-10-28

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