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Strategic standardization in trade with network externalities

Author: Kende, Michael INSEAD Area: Economics and Political Science Series: Working Paper ; 92/50/EPS Publisher: Fontainebleau : INSEAD, 1992.Language: EnglishDescription: 39 p.Type of document: INSEAD Working Paper Online Access: Click here Abstract: This paper shows the effects on profits and consumer surplus of standardizing a good from which consumers derive greater utility the more consumers there are of a compatible good. The model is of a two-period, two-country world in which there is at most one firm developing the good in each country. In this framework one of the firms licensing its technology to other firms in the same country is a credible commitment to increase the output and thus the network of the licensed good. The results show that if the network externalities are large enough, licensing can increase the profit of the licensor even if there is no foreign competitor producing a similar good. If there is a foreign competitor, licensing increases profits of the licensor at the expense of the rival firm regardless of the level of network externalities. Therefore, because licensing increases profits of the licensing country at home and abroad, licensing in this framework is a strategic trade policy.
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This paper shows the effects on profits and consumer surplus of standardizing a good from which consumers derive greater utility the more consumers there are of a compatible good. The model is of a two-period, two-country world in which there is at most one firm developing the good in each country. In this framework one of the firms licensing its technology to other firms in the same country is a credible commitment to increase the output and thus the network of the licensed good. The results show that if the network externalities are large enough, licensing can increase the profit of the licensor even if there is no foreign competitor producing a similar good. If there is a foreign competitor, licensing increases profits of the licensor at the expense of the rival firm regardless of the level of network externalities. Therefore, because licensing increases profits of the licensing country at home and abroad, licensing in this framework is a strategic trade policy.

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