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Technological Innovation and Market Turbulence: The Dot-com Experience

  • Zhu Wang

    (Federal Reserve Bank of Kansas City)

Registered author(s):

This paper explains market turbulence, such as the recent dot-com boom/bust cycle, as equilibrium industry dynamics driven by the synergy between new and existing technologies. When a major technological innovation arrives, a wave of new firms implement the innovation and enter the market. However, if the innovation complements existing technology, some new entrants later will be forced out as more and more incumbent firms succeed in adopting the innovation. It is argued that the diffusion of internet technology among traditional brick-and-mortar firms was indeed the driving force behind the rise and fall of dot-coms as well as the sustained growth of e-commerce. Systematic empirical evidence from retail and banking industries supports the theoretical findings. (Copyright: Elsevier)

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File URL: http://dx.doi.org/10.1016/j.red.2006.10.001
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Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.

Volume (Year): 10 (2007)
Issue (Month): 1 (January)
Pages: 78-105

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Handle: RePEc:red:issued:06-47
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  1. 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.
  2. Zhu Wang, 2006. "Learning, diffusion and the industry life cycle," Payments System Research Working Paper PSR WP 04-01, Federal Reserve Bank of Kansas City.
  3. Jovanovic, B. & MacDonald, G.M., 1992. "The Life-Cycle of Competitive Industry," Papers 92-09, Rochester, Business - Financial Research and Policy Studies.
  4. Pastor, Lubos & Veronesi, Pietro, 2006. "Was there a Nasdaq bubble in the late 1990s?," Journal of Financial Economics, Elsevier, vol. 81(1), pages 61-100, July.
  5. Joseph Zeira, 2000. "Informational overshooting, booms and crashes," Proceedings, Federal Reserve Bank of San Francisco, issue Apr.
  6. 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.
  7. Boyan Jovanovic, 2004. "The Pre-Producers," 2004 Meeting Papers 91, Society for Economic Dynamics.
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  11. Paul Gompers & Anna Kovner & Josh Lerner & David Scharfstein, 2005. "Venture Capital Investment Cycles: The Impact of Public Markets," NBER Working Papers 11385, National Bureau of Economic Research, Inc.
  12. Senn, James A., 2000. "Electronic Commerce Beyond the "dot com" Boom," National Tax Journal, National Tax Association, vol. 53(n. 3), pages 373-84, September.
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  15. Robert DeYoung, 2005. "The Performance of Internet-Based Business Models: Evidence from the Banking Industry," The Journal of Business, University of Chicago Press, vol. 78(3), pages 893-948, May.
  16. Garber, Peter M, 1990. "Famous First Bubbles," Journal of Economic Perspectives, American Economic Association, vol. 4(2), pages 35-54, Spring.
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