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Exploration and Exploitation in the Presence of Network Externalities

Graduate School of Management, Korea Advanced Institute of Science and Technology, 207–43 Cheongryangri–dong, Dongdaemun–gu, Seoul 190–102, Korea, and Center for Emerging–Technology Assessment, Science and Technology Policy Institute, 395–70 Shindaebang–dong, Tongjak–gu, Seoul 156–714, Korea
Graduate School of Management, Korea Advanced Institute of Science and Technology, 207–43 Cheongryangri–dong, Dongdaemun–gu, Seoul 190–102, Korea
School of Management Information, Paichai University, 439–6 Doma 2–dong, Seo–gu, Taejon, Korea
ljs{at}kgsm.kaist.ac.kr
jlee{at}kgsm.kaist.ac.kr
ha.lee{at}bt.com

This paper examines the conditions under which exploration of a new, incompatible technologyis conducive to firm growth in the presence of network externalities. In particular, this study is motivated by the divergent evolutions of the PC and the workstation markets in response to a new technology: reduced instruction set computing (RISC). In the PC market, Intel has developed new microprocessors by maintaining compatibility with the established architecture, whereas it was radically replaced by RISC in the workstation market. History indicates that unlike the PC market, the workstation market consisted of a large number of power users, who are less sensitive to compatibility than ordinary users. Our numerical analysis indicates that the exploration of a new, incompatible technology is more likely to increase the chance of firm growth when there are a substantial number of power users or when a new technology is introduced before an established technology takes off.

Key Words: Network Externalities; Exploration and Exploitation; Innovation; Technology
History: Received: March 1, 2001;

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