R&D investment and network effects: a dynamic model of the search engine market

This paper considers R&D investment for quality improvement in adynamic duopoly game in the search engine market. The aim is todetermine the circumstances under which asymmetry between searchengines (in terms of quality) tends to increase or decrease over time. Ishow that when the future sufficiently matters, the low-quality searchengine can catch up with the high-quality engine by investing inquality. In contrast, when only the present matters, the high-qualitysearch engine wins and the structure of the market transitions to amonopoly. I also show that a shift in asymmetry between firms canresult in either an increase or decrease in consumer welfare, dependingon the degree of substitutability between the two search engines.