Durable Goods, Innovation and Network Externalities

We develop a model of R&D competition between an incumbent and a potential entrant with network externalities and durable goods. We show that the threat of entry eliminates the commitment problem that an incumbent may face in its R&D decision due to the goods? durability. Moreover, a potential entrant over-invests in R&D and an established incumbent might exhibit higher, equal or lower R&D investments in comparison with the social optimum. In our model, the incumbent?s commitment problem and the efficiency of its R&D level are determined by the extent of the network externalities.