Feedback mechanism in the evolution of networks: The installed user base and innovation in the communications sector

In the presence of network externalities, demand is strongly affected by major technology diffusion processes. Therefore, not only sales levels, but also the installed user base of network technologies may influence R&D intensity via the price mechanism. This causality may, however, not be unidirectional. This paper develops and tests an econometric model that allows both contemporaneous correlation and inter-temporal feedback between the processes of technology creation and diffusion. We use industry-level data from 1980 to 1995 to empirically explore the patterns of causality between the evolution of communications networks and the determination of the R&D intensity of the communications sectors among OECD countries.