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Disruptive Technologies and the Emergence of Competition

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  • Adner, Ron
  • Zemsky, Peter

Abstract

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.

Suggested Citation

  • Adner, Ron & Zemsky, Peter, 2003. "Disruptive Technologies and the Emergence of Competition," CEPR Discussion Papers 3994, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:3994
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    References listed on IDEAS

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    1. Christopher Pleatsikas & David Teece, 2003. "The Analysis of Market Definition and Market Power in the Context of Rapid Innovation," World Scientific Book Chapters,in: Essays In Technology Management And Policy Selected Papers of David J Teece, chapter 14, pages 385-416 World Scientific Publishing Co. Pte. Ltd..
    2. Farrell, Joseph & Shapiro, Carl, 1990. "Horizontal Mergers: An Equilibrium Analysis," American Economic Review, American Economic Association, vol. 80(1), pages 107-126, March.
    3. Adam M. Brandenburger & Harborne W. Stuart, 1996. "Value-based Business Strategy," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 5(1), pages 5-24, March.
    4. David J. TEECE, 2008. "Profiting from technological innovation: Implications for integration, collaboration, licensing and public policy," World Scientific Book Chapters,in: The Transfer And Licensing Of Know-How And Intellectual Property Understanding the Multinational Enterprise in the Modern World, chapter 5, pages 67-87 World Scientific Publishing Co. Pte. Ltd..
    5. Stephen W. Salant & Sheldon Switzer & Robert J. Reynolds, 1983. "Losses From Horizontal Merger: The Effects of an Exogenous Change in Industry Structure on Cournot-Nash Equilibrium," The Quarterly Journal of Economics, Oxford University Press, vol. 98(2), pages 185-199.
    6. Katz, Michael L & Shapiro, Carl, 1985. "Network Externalities, Competition, and Compatibility," American Economic Review, American Economic Association, vol. 75(3), pages 424-440, June.
    7. Avner Shaked & John Sutton, 1982. "Relaxing Price Competition Through Product Differentiation," Review of Economic Studies, Oxford University Press, vol. 49(1), pages 3-13.
    8. Perry, Martin K & Porter, Robert H, 1985. "Oligopoly and the Incentive for Horizontal Merger," American Economic Review, American Economic Association, vol. 75(1), pages 219-227, March.
    9. 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.
    10. Klepper, Steven, 1996. "Entry, Exit, Growth, and Innovation over the Product Life Cycle," American Economic Review, American Economic Association, vol. 86(3), pages 562-583, June.
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    Cited by:

    1. repec:eee:tefoso:v:125:y:2017:i:c:p:166-177 is not listed on IDEAS
    2. Palmberg, Christopher & Nikulainen, Tuomo, 2006. "Industrial Renewal and Growth through Nanotechnology ? - An Overview with Focus on Finland," Discussion Papers 1020, The Research Institute of the Finnish Economy.

    More about this item

    Keywords

    market definition; mergers; threat of substitutes;

    JEL classification:

    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General
    • L40 - Industrial Organization - - Antitrust Issues and Policies - - - General
    • M20 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics - - - General

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