The Dynamics of Technological Adoption in Hardware/Software Systems: The Case of Compact Disc Players

CEPR Discussion Paper Series No. 2078

Posted: 6 Jul 1999

See all articles by Rafael Rob

Rafael Rob

University of Pennsylvania - Department of Economics

Neil Gandal

Berglas School of Economics, Tel Aviv University; Centre for Economic Policy Research (CEPR)

Michael Kende

Federal Communications Commission (FCC)

Multiple version iconThere are 2 versions of this paper

Date Written: February 1999

Abstract

In this paper we examine the diffusion of a hardware/software system. For such systems there is interdependence between the hardware adoption decisions of consumers and the supply decisions of software manufacturers. Hence there can be bottlenecks to the diffusion of the system which stem not from high prices but from the fact that the complementary product is not available. We consider the CD-industry and estimate the (direct) elasticity of adoption with respect to CD prices and (the cross) elasticity with respect to the variety of CD-titles.

Our results show that the cross elasticity is indeed significant so that the presence of complementarities poses a serious bottleneck problem for the diffusion of the base product. We illustrate two applications of our methodology: (i) the business-policy question of how to subsidize a new base product which is contingent on a sufficiently large supply of complementary products, and (ii) the public-policy question of what are the benefits of imposing backward compatibility on a new technology (e.g., high definition televisions).

JEL Classification: K2, L80

Suggested Citation

Rob, Rafael and Gandal, Neil and Kende, Michael, The Dynamics of Technological Adoption in Hardware/Software Systems: The Case of Compact Disc Players (February 1999). CEPR Discussion Paper Series No. 2078. Available at SSRN: https://ssrn.com/abstract=155093

Rafael Rob (Contact Author)

University of Pennsylvania - Department of Economics ( email )

Ronald O. Perelman Center for Political Science
133 South 36th Street
Philadelphia, PA 19104-6297
United States
215-898-6775 (Phone)
215-573-2057 (Fax)

Neil Gandal

Berglas School of Economics, Tel Aviv University ( email )

Tel Aviv University
Tel Aviv 69978
Israel
+972 3 640 9907 (Phone)
+972 3 640 9908 (Fax)

HOME PAGE: http://www.neilgandal.com/

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Michael Kende

Federal Communications Commission (FCC) ( email )

1919 M Street, NW
Washington, DC 20554
United States

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