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Technological innovation and market turbulence: the dot-com experience

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Author Info
Zhu Wang

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Abstract

This paper explains market turbulence, such as the recent dotcom boom/bust cycle, as equilibrium industry dynamics triggered by technology innovation. When a major technology innovation arrives, a wave of new firms enter the market implementing the innovation for profits. However, if the innovation complements existing technology, some new entrants will later be forced out as more and more incumbent firms succeed in adopting the innovation. It is shown that the diffusion of Internet technology among traditional brick-and-mortar firms is indeed the driving force behind the rise and fall of dotcoms as well as the sustained growth of e-commerce. Empirical evidence from retail and banking industries supports the theoretical findings. ; Earlier title: Technology innovation and market turbulence: a dot-com example

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Paper provided by Federal Reserve Bank of Kansas City in its series Payments System Research Working Paper with number PSR WP 05-02.

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Date of creation: 2005
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Publication status: Published in Review of Economic Dynamics, Jan. 2007, v.10, no. 1 (pp 78-105)
Handle: RePEc:fip:fedkpw:psrwp05-02

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Keywords: Technology;

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Zeira, Joseph, 1999. "Informational overshooting, booms, and crashes," Journal of Monetary Economics, Elsevier, vol. 43(1), pages 237-257, February. [Downloadable!] (restricted)
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  2. Jovanovic, Boyan & MacDonald, Glenn M, 1994. "The Life Cycle of a Competitive Industry," Journal of Political Economy, University of Chicago Press, vol. 102(2), pages 322-47, April. [Downloadable!] (restricted)
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  3. Boyan Jovanovic, 2004. "The Pre-Producers," 2004 Meeting Papers 91, Society for Economic Dynamics. [Downloadable!]
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  4. Horvath, Michael & Schivardi, Fabiano & Woywode, Michael, 2001. "On industry life-cycles: delay, entry, and shakeout in beer brewing," International Journal of Industrial Organization, Elsevier, vol. 19(7), pages 1023-1052, July. [Downloadable!] (restricted)
  5. Garber, Peter M, 1990. "Famous First Bubbles," Journal of Economic Perspectives, American Economic Association, vol. 4(2), pages 35-54, Spring. [Downloadable!] (restricted)
  6. Dilip Abreu & Markus K. Brunnermeier, 2003. "Bubbles and Crashes," Econometrica, Econometric Society, vol. 71(1), pages 173-204, January. [Downloadable!] (restricted)
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  7. Stephen F. LeRoy, 2004. "Rational Exuberance," Journal of Economic Literature, American Economic Association, vol. 42(3), pages 783-804, September. [Downloadable!] (restricted)
  8. Lubos Pastor & Pietro Veronesi, 2004. "Was There a Nasdaq Bubble in the Late 1990s?," NBER Working Papers 10581, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  9. Richard J. Sullivan & Zhu Wang, 2005. "Internet banking: an exploration in technology diffusion and impact," Payments System Research Working Paper PSR WP 05-05, Federal Reserve Bank of Kansas City. [Downloadable!]
  10. Klepper, Steven, 1996. "Entry, Exit, Growth, and Innovation over the Product Life Cycle," American Economic Review, American Economic Association, vol. 86(3), pages 562-83, June. [Downloadable!] (restricted)
  11. Eli Ofek & Matthew Richardson, 2003. "DotCom Mania: The Rise and Fall of Internet Stock Prices," Journal of Finance, American Finance Association, vol. 58(3), pages 1113-1138, 06. [Downloadable!] (restricted)
  12. Robert DeYoung, 2005. "The Performance of Internet-Based Business Models: Evidence from the Banking Industry," Journal of Business, University of Chicago Press, vol. 78(3), pages 893-948, May. [Downloadable!]
  13. Rob, Rafael, 1991. "Learning and Capacity Expansion under Demand Uncertainty," Review of Economic Studies, Blackwell Publishing, vol. 58(4), pages 655-75, July. [Downloadable!] (restricted)
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Richard J. Sullivan & Zhu Wang, 2005. "Internet banking: an exploration in technology diffusion and impact," Payments System Research Working Paper PSR WP 05-05, Federal Reserve Bank of Kansas City. [Downloadable!]
  2. Zhu Wang, 2008. "Income Distribution, Market Size and the Evolution of Industry," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 11(3), pages 542-565, July. [Downloadable!] (restricted)
    Other versions:
  3. Fumiko Hayashi & Zhu Wang, 2008. "Product innovation and firm survival in a network industry," Research Working Paper RWP 08-14, Federal Reserve Bank of Kansas City. [Downloadable!]
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