How Network Externality and Compatibility Affect the R&D Risk Choices in a Duopoly Market

This study develops a duopoly model describing the optimal choice of R&D risk among R&D projects with the same expected outcome in a market exhibiting network externalities. It demonstrates that, when firms’ product is incompatible, the level of R&D risk increases in the intensity of network externality. However, when product is compatible, the impact of network externality on the R&D risk choices depends on the degree of market coverage. Moreover, firms carry on higher (resp. lower) risk R&D project when their product is incompatible than compatible in a full-coverage (resp. partial-coverage) market.