Network effects, Compatibility and the Environment : The Case of Hydrogen Powered Cars


Conrad, Klaus


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URL: https://ub-madoc.bib.uni-mannheim.de/998
URN: urn:nbn:de:bsz:180-madoc-9985
Document Type: Working paper
Year of publication: 2004
The title of a journal, publication series: Discussion Papers / Institut für Volkswirtschaftslehre und Statistik ; Department of Economics, Universität Mannheim
Volume: 613
Place of publication: Mannheim
Publication language: English
Institution: School of Law and Economics > Sonstige - Fakultät für Rechtswissenschaft und Volkswirtschaftslehre
MADOC publication series: Institut für Volkswirtschaftslehre und Statistik > Discussion Papers
Subject: 330 Economics
Classification: JEL: Q42 L15 L62 L11 ,
Subject headings (SWD): Kraftwagen , Kompatibilität , Innovation , Preisvergleich
Abstract: The paper addresses the problem of entry barriers for a new technology – hydrogen powered cars or cars with fuel cell engines – if the network of its filling stations is missing or thin. We use Hotelling's model of product differentiation to characterize a situation where an incumbent firm produces the old technology, compatible with the existing network of filling stations, and an entrant, who cannot use this network for its products. We assume that the entrant has to invest in remodeling existing filling stations for making them compatible. This, however, raises his costs. In the intertemporal setting of our model, the Hotelling pricing rule for exhaustible resources encourages the entrant to invest in compatibility because the price of gasoline will rise in the long run to the price of the backstop technology - fuel cells. Depending on the cost of compatibility, our model indicates three possible outcomes. Either, the costs of compatibility are too high and governmental support is required. Or the incumbent bears losses in initial periods by waiting for profits in later periods when full compatibility of the network is reached. Or the entrant benefits from the fact that the price of oil reaches the price of the backstop technology (full cells) rather soon.

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Conrad, Klaus (2004) Network effects, Compatibility and the Environment : The Case of Hydrogen Powered Cars. Open Access Discussion Papers / Institut für Volkswirtschaftslehre und Statistik ; Department of Economics, Universität Mannheim Mannheim 613 [Working paper]
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