Inter-Technology versus Intra-Technology Competition in Network Markets

The model analyzes the competition between two firms when their incompatible technologies exhibit network effects in that high expected sales increase the willingness to pay for the corresponding good. An incumbent firm faces the strategic choice of whether to share its superior technology (via free licensing) with a follower or to keep its technology for itself. The first option of sponsoring intra-technology competition increases the incumbent firm’s network and thus consumers’ willingness to pay. On the other hand, the latter option involves inter-technology competition. Depending on the relative cost advantage of the incumbent firm, the entry of the rival technology may be blockaded, both technologies can coexist in an incompatible duopoly or the incumbent firm may deter the entry of its rival. The model investigates the incumbent firm’s choice of whether to sponsor intra-technology competition or to insist on inter-technology competition.