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Disruptive Technologies and the Emergence of Competition

  • Adner, Ron
  • Zemsky, Peter
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    We formalize the phenomenon of disruptive technologies (Christensen, 1997) that initially serve isolated market niches and, as they mature, expand to displace established technologies from mainstream segments. Using a model of horizontal and vertical differentiation with discrete customer segmentation, we show how the threat of disruption varies with the rate of technological advance, the number of firms using each technology, segments sizes, marginal costs, and the ability of firms to price discriminate. We characterize the effect of disruption on prices, market shares, social welfare and innovation incentives. We show that a shift from isolation to disruption lowers prices and increases social welfare, but may either increase or decrease the profits of firms using the new technology. By identifying the drivers and implications of technology competition, we contribute to debates about market definition that are often central in anti-trust deliberations. Moreover, we call into question standard results on the effects of mergers in Cournot models. Prior work finds that, absent efficiency gains, mergers among Cournot competitors lower welfare and are only profitable for the merging firms at high levels of concentration. We show that neither of these results need hold when mergers can alter the boundaries of technology competition.

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    Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3994.

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    Date of creation: Jul 2003
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    Handle: RePEc:cpr:ceprdp:3994
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    1. Adam M. Brandenburger & Harborne W. Stuart, 1996. "Value-based Business Strategy," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 5(1), pages 5-24, 03.
    2. Pleatsikas, Christopher & Teece, David, 2001. "The analysis of market definition and market power in the context of rapid innovation," International Journal of Industrial Organization, Elsevier, vol. 19(5), pages 665-693, April.
    3. Joseph Farrell and Carl Shapiro., 1988. "Horizontal Mergers: An Equilibrium Analysis," Economics Working Papers 8880, University of California at Berkeley.
    4. Shaked, Avner & Sutton, John, 1982. "Relaxing Price Competition through Product Differentiation," Review of Economic Studies, Wiley Blackwell, vol. 49(1), pages 3-13, January.
    5. Teece, David J., 1986. "Profiting from technological innovation: Implications for integration, collaboration, licensing and public policy," Research Policy, Elsevier, vol. 15(6), pages 285-305, December.
    6. 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.
    7. Salant, Stephen W & Switzer, Sheldon & Reynolds, Robert J, 1983. "Losses from Horizontal Merger: The Effects of an Exogenous Change in Industry Structure on Cournot-Nash Equilibrium," The Quarterly Journal of Economics, MIT Press, vol. 98(2), pages 185-99, May.
    8. Katz, Michael L & Shapiro, Carl, 1985. "Network Externalities, Competition, and Compatibility," American Economic Review, American Economic Association, vol. 75(3), pages 424-40, June.
    9. Perry, Martin K & Porter, Robert H, 1985. "Oligopoly and the Incentive for Horizontal Merger," American Economic Review, American Economic Association, vol. 75(1), pages 219-27, March.
    10. Adner, Ron & Zemsky, Peter, 2003. "Strategy Dynamics through a Demand-Based Lens: The Evolution of Market Boundaries, Resource Rents and Competitive Positions," CEPR Discussion Papers 3732, C.E.P.R. Discussion Papers.
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