Technology Advancement in Network Markets and Agent Bargaining

Abstract

I extend the Katz and Shapiro (1985) oligopoly model with network effects to encompass products with differing technological levels. I focus on a version of the model in which firms can invest in order to improve the probability that they advance their technology from a low level to a high level. I find that better available technology, lower adoption costs, and stronger network effects increase the rate of technological advancement and social welfare. Incompatible networks have lower total surplus but higher adoption rates. The investment competition dissipates to some degree the potential producer rents from successful advancement, particularly in the incompatible network case where increased competition can result in lower total welfare. A policy imposing a technology standard (via a high type technology requirement) yields the highest adoption rates, but negatively affects overall welfare. Analysis of the optimal tax/subsidy policy shows that taxes are optimal in most cases, since the private incentive to advance technology outweighs the social incentive. Negotiations in the real world can rarely be represented by a simple bargaining session between two parties. Agent bargaining, when one player represents another party in a bargaining situation for some form of compensation, is one such complicating circumstance from the real world. I explore the effects that this third entity has on the outcome of negotiations. I conduct a laboratory experiment emulating a simple example of agent bargaining. I test a hypothesis formulated using sequential-Nash-bargaining and also propose behavioral explanations for the observed behavior. I find that sequential-Nash-bargaining does a poor job of explaining our observations, and that using a weighted minimization of the differences between each of the three parties as a focal point provides a promising alternative.