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Title: Innovation, Pricing and Targeting in Networks

Author(s): Fabrizio Panebianco, Thierry Verdier and Yves Zenou

Publication Date: July 2016

Keyword(s): diffusion centrality, Innovation, Networks and targets

Programme Area(s): Industrial Organization

Abstract: Consider a network of firms where a firm T is given the opportunity to innovate a product (first-generation innovation). If successful, this firm can temporarily sell this innovation to her direct neighbors because this will give her access to a larger market. However, if her direct neighbors innovate themselves on top of firm T's innovation (second-generation innovations), then firm T loses the right to sell her initial innovation to the remaining firms in the market. We analyze this game where each firm (T and her direct neighbors) has to decide at which price they want to sell their innovation. We show that the optimal price policy of each firm depends on the level of property rights protection, the position of firm T in the network, her degree and the size of the market. We then analyze the welfare implications of our model where the planner that maximizes total welfare has to decide which firm to target. We show that it depends on the level of property rights protection and on the network structure in a non-trivial way.

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Bibliographic Reference

Panebianco, F, Verdier, T and Zenou, Y. 2016. 'Innovation, Pricing and Targeting in Networks'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=11398