Complementary Network Externalities and Technological Adoption

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Abstract
We address the adoption of technology when there are network externalities and networks are characterized by complementary products produced by different firms. We show that the market outcome is efficient if the software firms are monopolistic competitors. If the software firms are Bertrand competitors, a hardware technology with lower software development costs is adopted for many parameter values for which it is socially optimal to adopt the other technology. The overadoption is due to a discrepancy between the private and social value of having a larger network: this divergence is increasing in the software development costs. We also examine various contractual arrangements between hardware firms and software firms which internalize the network externality.
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