Market Experimentation and New Technology Adoption
50 Pages Posted: 25 Feb 2020 Last revised: 8 May 2020
Date Written: January 26, 2020
This article studies the adoption and diffusion of a product innovation in a duopoly market. Firms are asymmetric, and learning is endogenously determined by consumer purchases. In equilibrium, both high- and low-quality firms may lead adoption, and first-movers are often uniquely determined by initial beliefs. Equilibrium adoption patterns are consistent with and explain several empirical phenomena. To maximize welfare, a social planner prefers sequential adoption over a wider range of beliefs than occurs in equilibrium. A change in market structure, specifically a merger to monopoly, unambiguously improves the timing of initial adoption; but innovation diffusion may become less efficient.
Keywords: innovation adoption, innovation diffusion, market experimentation, product innovation, strategic investment timing
JEL Classification: C73, D25, O31
Suggested Citation: Suggested Citation