Why an innovator should not be too greedy?

Abstract

An innovating firm has developed a new technology for a system in the network externality environment and is now considering how to commercialize it. In this paper, strategies of the innovator for profitably introducing its new technology under different market conditions are studied. The innovator can exercise the strategy of opening its technology over components of the system. By adjusting the portion of the opened components, it can decide the market structure under which the system good is sold. According to its decisions, it could be the monopolist for the whole system, monopolist for only a set of components, or just one of many firms in a competitive market. The research results show that under some realistic conditions - when the magnitude of the network externality is moderate, the product quality is mediocre, and the entrant`s research and development cost is not very low, the innovator can obtain the most profit by producing a limited set of components as the monopolist. Also the set of monopolistic components should be determined such that the entrant`s expected profit from entry equals to the potential entrants` research and development cost for the components. With this strategy the innovator can lower the price of the system and maintain its monopolistic position in the market at the same time.