Analysis of Industry Equilibria in Models with Sustaining and Disruptive Technology

27 Pages Posted: 31 Aug 2007 Last revised: 26 Feb 2015

See all articles by Xiao Huang

Xiao Huang

John Molson School of Business, Concordia University

Greys Sosic

University of Southern California - Marshall School of Business

Date Written: April 27, 2010

Abstract

This paper analyzes a special type of technology evolution, referred to in the literature as disruptive technology vs. sustaining technology. In general, “old” products based on sustaining technology are perceived to be superior to the “new” ones based on disruptive technology. However, the latter have distinctive features that allow them to attract an exclusive set of customers. Examples include notebooks vs. netbooks, hard-disk drives vs. solid-state drives, laser printers vs. inkjet printers, etc. We consider a model with an established firm and an entrant firm that have heterogeneous product-offering capabilities: the established firm can offer either or both types of products, while the entrant firm can only offer new products. Firms make capacity, pricing, and quantity decisions that maximize their ex-ante profit. Within this framework, we analyze deterministic games with perfect information and stochastic games with uncertain valuation of the disruptive technology. Equilibrium decisions are discussed under various market conditions, as well as under dedicated vs. flexible capacity assumptions.

While over-investment and over-production may occur in a stochastic game with dedicated capacities, the equilibrium capacity decisions seem to be more “rational” if the established firm utilizes flexibly capacity, or if the dedicated capacity can be converted ex-post (albeit at some expense).

Keywords: disruptive technology; competition; capacity; pricing; Nash equilibrium; new product introduction;

JEL Classification: O33, L11, D24, D43

Suggested Citation

Huang, Xiao and Sosic, Greys, Analysis of Industry Equilibria in Models with Sustaining and Disruptive Technology (April 27, 2010). Available at SSRN: https://ssrn.com/abstract=1011016 or http://dx.doi.org/10.2139/ssrn.1011016

Xiao Huang

John Molson School of Business, Concordia University ( email )

1455 de Maisonneuve Blvd West
Montreal, Quebec H3G 1M8
Canada

HOME PAGE: http://www.xiaohuang.ca

Greys Sosic (Contact Author)

University of Southern California - Marshall School of Business ( email )

701 Exposition Blvd
Los Angeles, CA 90089
United States

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