Subsidising network technology adoption the case of publishers and E-readers: Is there a need for vertical agreements?
To market a new network technology effectively, manufacturers need to understand the structure and size of network effects associated with the product.If consumers’ surplus from adoption depends positively on the number of interconnections in the network, early adopters may need to be subsidized until a critical mass is reached. Moreover, in a two-sided market where platforms and complementary contents are constrained to non-negative prices, subsidies can be provided both by platform manufacturers and by producers of complementary contents. The article presents a model to analyse adoption dynamics with different subsidies and different stand-alone values for technology. The model shows that if the stand-alone value of technology is limited, subsidies from complementary contents producers may be pivotal to reach the critical mass. Moreover, under given conditions, this type of subsidies can lead to a more efficient adoption, increasing social welfare. In this case, assuming a monopolist platform manufacturer of the technology, complete contracts are needed to reach the Pareto optimal equilibrium.