PRODUCT INTRODUCTION WITH NETWORK EXTERNALITIES

We study the introduction of a new product in a market with network externalities. There is a common presumption that such markets exhibit excess inertia, i.e. that they are biased towards existing products. In contrast, we provide conditions under which equilibrium involves insufficient friction, i.e. a tendency to rush into new, incompatible technologies. We also analyze the firms' incentives to make their products compatible, and we show that the firm introducing the new technology is biased against compatibility.