R&D for Quality Improvement and Network Externalities

We investigate the bearings of network externalities on productquality improvements requiring costly R&D investments. The modelconsiders the dynamic behaviour of a monopolist alternativelymaximising profits or social welfare. On the one hand, we confirmmuch of the acquired wisdom from the static literature on the sametopic, about the arising of quality undersupply at the privateoptimum. On the other, we identify the initial conditions thatmust be met for R&D activity to be observed under profit-seekingbehaviour. We also show that the presence of network externalitiesaffects the optimal behaviour of the profit-seeking firm but notthat of a benevolent planner, who serves all consumers and smoothsthe R&D costs leading to a steady state quality which isindependent of network concerns.