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Some Economic Consequences Of Anticipating Technical Advance

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  • MORTON I. KAMIEN
  • NANCY L. SCHWARTZ

Abstract

Using a simple model of a long run profit maximizing firm, we investigated the consequences of foreseeing future technical advance upon the adoption of new technology, scrapping of old, and for price and output of the firm's product. To simplify the analysis and highlight the conclusions, we assumed all technologies embodied in equipment and all equipment infinitely durable. It was shown that the often‐used formulas for the unit cost of using capital over a finite (rkj/(l — aT)) or infinite (rkj) life are appropriate only if the equipment does not become outmoded during its economic life and if there are no demand shifts in that time interval. Otherwise, the current cost of using capital (ex ante) must reflect future lesser or greater earning power of that capital due to outmodedness or demand shifts. Anticipation of technical advance tends to delay scrapping of old equipment and retard installation of new, with current output smaller and price higher than if technology is stagnant. Selection among currently competing technologies is also affected by the course future technical advance is expected to follow. The economic lifetime of capital equipment is independent of the elasticity of demand for the firm's output. On the other hand anticipation of demand expansion tends to partially or wholly offset the effect of anticipating future technical advance, while expected demand decline tends to reinforce it. Uncertainty about when improved technology will appear tends to retard adoption of current best practice technology, to retard scrapping of outmoded technology, restrict output and elevate price, in comparison with pptimal policy when the time of availability is believed known. The optimal policy is unaffected when it is the magnitude of the improvement rather than its timing which is unknown.

Suggested Citation

  • Morton I. Kamien & Nancy L. Schwartz, 1972. "Some Economic Consequences Of Anticipating Technical Advance," Economic Inquiry, Western Economic Association International, vol. 10(2), pages 123-138, June.
    • Handle: RePEc:bla:ecinqu:v:10:y:1972:i:2:p:123-138
    DOI: 10.1111/j.1465-7295.1972.tb01594.x
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    References listed on IDEAS

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    1. Kamien, Morton I & Schwartz, Nancy L, 1971. "Limit Pricing and Uncertain Entry," Econometrica, Econometric Society, vol. 39(3), pages 441-454, May.
    2. Koizumi, Susumu, 1969. "Technical Progress and Investment," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 10(1), pages 68-81, February.
    3. Kamien, Morton I & Schwartz, Nancy L, 1970. "Market Structure, Elasticity of Demand and Incentive to Invent," Journal of Law and Economics, University of Chicago Press, vol. 13(1), pages 241-252, April.
    4. Hirohide Hinomoto, 1965. "Capacity Expansion with Facilities Under Technological Improvement," Management Science, INFORMS, vol. 11(5), pages 581-592, March.
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    Cited by:

    1. Spiro E. Stefanou, 1987. "Technical Change, Uncertainty, and Investment," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 69(1), pages 158-165.
    2. Gezer, Serhat, 2019. "Delaying product introduction: A dynamic analysis with endogenous time horizon," Journal of Economic Dynamics and Control, Elsevier, vol. 102(C), pages 96-114.
    3. Just, Richard E. & Netanyahu, Sinaia & Olson, Lars J., 2005. "Depletion of natural resources, technological uncertainty, and the adoption of technological substitutes," Resource and Energy Economics, Elsevier, vol. 27(2), pages 91-108, June.

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