Adoption is Not Development: First Mover Advantages in the Diffusion of New Technology
46 Pages Posted: 16 Jan 2007
Date Written: November 30, 2006
The diffusion of new technology among competing firms is of long-standing interest in industrial organization. There is an extensive theoretical literature on technology adoption in which firms can instantaneously deploy a new technology in the market at a cost that is exogenously falling over time. While such models explain diffusion (firms adopt asynchronously), Fudenberg and Tirole (1985) show that the incentives to preemptively adopt in sub-game perfect equilibria can cause rents to be equalized across firms. In contrast, we study technology development where costly and time consuming effort is required to deploy a new technology. With diminishing returns to instantaneous effort, delaying deployment reduces the firm's cost, as in adoption models. However, the incentive to preempt is lower: with its development already partially complete, a preempted firm delays deployment less than with adoption. We provide reasonable conditions under which the sub-game perfect equilibrium outcome corresponds that in the pre-commitment equilibrium first proposed by Reinganum (1981a, 1981b), yielding both diffusion and first mover advantages for the case of technology development.
Keywords: preemption, rent equalization, sustainable competitive advantage, pre-commitment equilibria, lead times
JEL Classification: D43, D92, L13, M21
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