IDEAS home Printed from https://ideas.repec.org/p/fip/fedkpw/psrwp05-02.html
   My bibliography  Save this paper

Technological innovation and market turbulence: the dot-com experience

Author

Listed:
  • Zhu Wang

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

Suggested Citation

  • Zhu Wang, 2005. "Technological innovation and market turbulence: the dot-com experience," Payments System Research Working Paper PSR WP 05-02, Federal Reserve Bank of Kansas City.
    • Handle: RePEc:fip:fedkpw:psrwp05-02
    as

    Download full text from publisher

    File URL: https://www.kansascityfed.org/documents/5152/rwp-PSR-WP0502-WANG.pdf
    File Function: Full-text
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Boyan Jovanovic, 2004. "The Pre-Producers," NBER Working Papers 10771, National Bureau of Economic Research, Inc.
    2. Dilip Abreu & Markus K. Brunnermeier, 2003. "Bubbles and Crashes," Econometrica, Econometric Society, vol. 71(1), pages 173-204, January.
    3. 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.
    4. Joseph Zeira, 2000. "Informational overshooting, booms and crashes," Proceedings, Federal Reserve Bank of San Francisco, issue Apr.
    5. 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.
    6. 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.
    7. 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 322-347, April.
    8. 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.
    9. Gompers, Paul & Kovner, Anna & Lerner, Josh & Scharfstein, David, 2008. "Venture capital investment cycles: The impact of public markets," Journal of Financial Economics, Elsevier, vol. 87(1), pages 1-23, January.
    10. 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.
    11. Stephen F. Le Roy, 2004. "Rational Exuberance," Journal of Economic Literature, American Economic Association, vol. 42(3), pages 783-804, September.
    12. 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.
    13. Garber, Peter M, 1990. "Famous First Bubbles," Journal of Economic Perspectives, American Economic Association, vol. 4(2), pages 35-54, Spring.
    14. Senn, James A., 2000. "Electronic Commerce Beyond the "Dot Com" Boom," National Tax Journal, National Tax Association;National Tax Journal, vol. 53(3), pages 373-384, September.
    15. 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 1113-1137, June.
    16. 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.
    17. Rafael Rob, 1991. "Learning and Capacity Expansion under Demand Uncertainty," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 58(4), pages 655-675.
    18. repec:bla:jfinan:v:58:y:2003:i:3:p:1113-1138 is not listed on IDEAS
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Russell Weinstein, 2022. "Local Labor Markets and Human Capital Investments," Journal of Human Resources, University of Wisconsin Press, vol. 57(5), pages 1498-1525.
    2. Richard J. Sullivan & Zhu Wang, 2020. "Technology Diffusion: The Case of Internet Banking," Economic Quarterly, Federal Reserve Bank of Richmond, issue 1Q, pages 19-40.
    3. Fafaliou, Irene & Giaka, Maria & Konstantios, Dimitrios & Polemis, Michael, 2022. "Firms’ ESG reputational risk and market longevity: A firm-level analysis for the United States," Journal of Business Research, Elsevier, vol. 149(C), pages 161-177.
    4. Sicheng He, 2021. "Growth, innovation, credit constraints, and stock price bubbles," Journal of Economics, Springer, vol. 133(3), pages 239-269, August.
    5. Fumiko Hayashi & Zhu Wang, 2008. "Product innovation and network survival in the U.S. ATM and debit card network industry," Research Working Paper RWP 08-14, Federal Reserve Bank of Kansas City.
    6. 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.
    7. Eva Hagsten, 2023. "ICT infrastructure in firms and online sales," Electronic Commerce Research, Springer, vol. 23(4), pages 2239-2258, December.
    8. König, Michael D. & Rogers, Tim, 2023. "Endogenous technology cycles in dynamic R&D networks," European Economic Review, Elsevier, vol. 158(C).
    9. Fumiko Hayashi & Bin Grace Li & Zhu Wang, 2017. "Innovation, Deregulation, and the Life Cycle of a Financial Service Industry," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 26, pages 180-203, October.
    10. Agnieszka Kuś & Agnieszka Kuś, 2023. "Photovoltaic Companies on the Warsaw Stock Exchange—Another Speculative Bubble or a Sign of the Times?," Energies, MDPI, vol. 16(2), pages 1-21, January.
    11. 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.
    12. Zhu Wang & Fumiko Hayashi, 2011. "Product Innovation and Network Survival in the U.S. ATM and Debit Card Industry," 2011 Meeting Papers 725, Society for Economic Dynamics.
    13. Patel, Pankaj C. & Pearce, John A. & Oghazi, Pejvak, 2021. "Not so myopic: Investors lowering short-term growth expectations under high industry ESG-sales-related dynamism and predictability," Journal of Business Research, Elsevier, vol. 128(C), pages 551-563.
    14. Anna Wziątek-Kubiak & Marek Pęczkowski, 2021. "Strengthening the Innovation Resilience of Polish Manufacturing Firms in Unstable Environments," Journal of the Knowledge Economy, Springer;Portland International Center for Management of Engineering and Technology (PICMET), vol. 12(2), pages 716-739, June.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Zhu Wang, 2006. "Technology Innovation and Market Turbulence: A Dotcom Example," 2006 Meeting Papers 508, Society for Economic Dynamics.
    2. Alessandro Barbarino & Boyan Jovanovic, 2007. "Shakeouts And Market Crashes," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 48(2), pages 385-420, May.
    3. 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.
    4. John Conlon, 2005. "Should Central Banks Burst Bubbles?," Game Theory and Information 0508007, University Library of Munich, Germany.
    5. 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.
    6. Greenwood, Robin & Shleifer, Andrei & You, Yang, 2019. "Bubbles for Fama," Journal of Financial Economics, Elsevier, vol. 131(1), pages 20-43.
    7. John R. Conlon, 2015. "Should Central Banks Burst Bubbles? Some Microeconomic Issues," Economic Journal, Royal Economic Society, vol. 125(582), pages 141-161, February.
    8. William H. Janeway & Ramana Nanda & Matthew Rhodes-Kropf, 2021. "Venture Capital Booms and Start-Up Financing," Annual Review of Financial Economics, Annual Reviews, vol. 13(1), pages 111-127, November.
    9. Daniel Andrei & Bruce I. Carlin, 2017. "Asset Pricing in the Quest for the New El Dorado," NBER Working Papers 23455, National Bureau of Economic Research, Inc.
    10. Robert A. Jarrow, 2015. "Asset Price Bubbles," Annual Review of Financial Economics, Annual Reviews, vol. 7(1), pages 201-218, December.
    11. Hanazono, Makoto & Yang, Huanxing, 2009. "Dynamic entry and exit with uncertain cost positions," International Journal of Industrial Organization, Elsevier, vol. 27(3), pages 474-487, May.
    12. Quinn, William, 2016. "Technological revolutions and speculative finance: Evidence from the British Bicycle Mania," QUCEH Working Paper Series 2016-06, Queen's University Belfast, Queen's University Centre for Economic History.
    13. Quinn, William & Turner, John D., 2021. "Riding the bubble or taken for a ride? Investors in the British bicycle mania," QUCEH Working Paper Series 21-07, Queen's University Belfast, Queen's University Centre for Economic History.
    14. William Quinn & John D. Turner, 2023. "Bubbles in history," Business History, Taylor & Francis Journals, vol. 65(4), pages 636-655, May.
    15. 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.
    16. Boyan Jovanovic & Chung-Yi Tse, 2006. "Creative Destruction in Industries," NBER Working Papers 12520, National Bureau of Economic Research, Inc.
    17. Boyan Jovanovic & Chung-Yi Tse, 2010. "Entry and Exit Echoes," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 13(3), pages 514-536, July.
    18. Stijn Claessens & M. Ayhan Kose, 2013. "Financial Crises: Explanations, Types and Implications," CAMA Working Papers 2013-06, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    19. Chung-Yi Tse, 2008. "Diffusion with variable production lead times," Journal of Economics, Springer, vol. 93(2), pages 177-202, March.
    20. Vivek Singh, 2013. "Did institutions herd during the internet bubble?," Review of Quantitative Finance and Accounting, Springer, vol. 41(3), pages 513-534, October.

    More about this item

    Keywords

    Technology;

    JEL classification:

    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General
    • O30 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - General

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:fip:fedkpw:psrwp05-02. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Zach Kastens (email available below). General contact details of provider: https://edirc.repec.org/data/frbkcus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.