Exploration and Exploitation in the presence of network externalities

This paper examines the conditions under which exploration of a new, incompatible technologyisconducive to firm growth in the presence of network externalities. In particular,this studyis motivated bythe divergent evolutions of the PC and the workstation markets inresponse to a new technology: reduced instruction set computing (RISC). In the PC market,Intel has developed new microprocessors bymaintaining compatibilitywith the establishedarchitecture, whereas it was radicallyr eplaced byRISC in the workstation market. Historyindicates that unlike the PC market, the workstation market consisted of a large numberof power users, who are less sensitive to compatibilitythan ordinaryusers. Our numericalanalysis indicates that the exploration of a new, incompatible technologyis more likelytoincrease the chance of firm growth when there are a substantial number of power users orwhen a new technologyis introduced before an established technologytakes off.(; ; ; )