On the optimal choices of R&D risk in a market with network externalities

This paper develops the Hotelling spatial model investigating the optimal choices of R&D risk in a market exhibiting network externalities. Assuming that firms perform R&D projects with identical expected outcomes but different risk degrees, it is found that, under certain conditions, the level of R&D risk is higher in the presence of positive network externalities than otherwise under private optimum. Moreover, the private optimum is insufficient from the viewpoint of social welfare and the intensity of network externalities is important in determining the extent of inefficiency. However, the subsidies for R&D can change this inefficiency.