Game analysis of R&D incentives and risk choices in markets with network externalities under uncertainty

In this paper, we propose a two-stage duopoly game model in markets with network externalities where firms compete in R&D first and then price. Firms are uncertain about the R&D outcomes when they choose R&D decisions in the first stage. The main findings are the following. First, when both the initial reservation prices and network intensities across firms are equivalent, the expected equilibrium R&D efforts for firms are equal and only depend on the spillover and R&D cost parameters, but when the initial reservation prices or the network intensities between firms differ, they are also affected by the compatibility, network intensities and differentiation parameters. Second, the aggregate expected R&D level in industry is smaller I than the social optimum. Third, there exists an area for risk cost parameter where the private and social choices for riskiness of (R&D) projects may differ.