Patents and enterprise innovation in network industries

We investigate factors that determine product innovation in network industries. We develop a demand-pull-technology-push model of enterprise innovation and find that enterprise innovation depends on firm's specific abilities to extend the network, consumer preferences over product price and network coverage, and the extent of knowledge spillovers in the network industry. Enterprise innovation increases when consumers value the network development more and when consumers are less sensitive to price increases. The enterprise innovation rises if effective R&D investments to a higher extent translate into network extending. The enterprise innovation is larger when the size of knowledge spillovers in the network industry is smaller. Enterprise innovation under no patent protection is higher or equal to the enterprise innovation under patent protection. Under patent protection, individual sunk costs of R&D increase and constitute a significant disincentive to invest in research and development.