Adoption of Superior Technology in Markets with Heterogeneous Network Externalities and Price Competition

In this paper we investigate whether markets with heterogeneous network externalities can be locked-in by old technologies even if superior technologies are available. Heterogeneous network externalities are present when some consumers care more about the size of the market share of a good than others. Interestingly, the answer depends on the quality difference between the old and the new technology and on whether firms compete in prices. Without price competition, a partial lock-in occurs if (and only if) the quality difference is small. In the presence of price competition, lock-in in the traditional sense completely disappears, although the old technology may keep some market share in some periods as the new technology is priced higher in equilibrium.