Environmental R&D risk choices with network externalities and emission tax in a differentiated duopoly

Abstract This paper investigates the optimal choice of firms’ environmental R&D (ER&D) risk in a duopoly market with network externalities and emission tax. Considering consumers’ expectations on the overall network size, we analyze two cases in our model: rational expectations and output commitments. The analysis shows that the ER&D risk increases with the intensity of network externalities and emission tax rate under both rational expectations and output commitments. We also find the ER&D risk is higher under output commitments than under rational expectations. Moreover, whether the private optimum is higher or lower than the social optimum depends on the relationship between the emission tax rate and the marginal environmental damage. Finally, the aforementioned conclusions remain unaffected by alterations in the manner in which competition is carried out, and the ER&D risk is higher under Bertrand competition than under Cournot competition.