Abstract:
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This paper derives a model of markets with system goods and two technological standards. An established standard incurs lower unit production costs but causes a negative externality. The paper derives the
conditions for policy intervention and compares the effect of direct and indirect cost-reducing subsidies in
two markets with system goods in the presence of externalities. If consumers are committed to the technology by purchasing one of the components, direct subsidies are preferable. For a medium-low cost difference
between technological standards and a low externality cost it is optimal to provide a direct subsidy only to
the first technology adopter. As the higher the externality cost raises, the more technology adopters should
be provided with direct subsidies. This effect is robust in all extensions.
In the absence of consumers commitment to a technological standard indirect and direct subsidies
are both desirable. In this case, the subsidy to the first adopter is lower then the subsidy to the second
adopter. Moreover, for the low cost difference between technological standards and low externality cost
the fi rst fi rm chooses a superior standard without policy intervention. Finally, a perfect compatibility
between components based on different technological standards enhances an advantage of indirect subsidies
for medium-high externality cost and cost difference between technological standards.
Journal of Economic Literature Classi fication Numbers: C72, D21, D40, H23, L13, L22, L51, O25,
O33, O38.
Keywords: Technological standards; complementary products; externalities; cost-reducing subsidies; compatibility. |