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Technological innovation and market turbulence: the dot-com experience

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  • Zhu Wang
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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

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Paper provided by Federal Reserve Bank of Kansas City in its series Payments System Research Working Paper with number PSR WP 05-02.

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Date of creation: 2005
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Publication status: Published in Review of Economic Dynamics, Jan. 2007, v.10, no. 1 (pp 78-105)
Handle: RePEc:fip:fedkpw:psrwp05-02
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Keywords: Technology;

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Find related papers by 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

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  1. Pástor, Luboš & Veronesi, Pietro, 2004. "Was There A Nasdaq Bubble in the Late 1990s?," CEPR Discussion Papers 4485, C.E.P.R. Discussion Papers.
  2. 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.
  3. Markus K Brunnermeier, 2002. "Bubbles and Crashes," FMG Discussion Papers dp401, Financial Markets Group.
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  8. 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.
  9. 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.
  10. 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.
  11. Stephen F. Le Roy, 2004. "Rational Exuberance," Journal of Economic Literature, American Economic Association, vol. 42(3), pages 783-804, September.
  12. Joseph Zeira, 2000. "Informational overshooting, booms and crashes," Proceedings, Federal Reserve Bank of San Francisco, issue Apr.
  13. 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.
  14. Garber, Peter M, 1990. "Famous First Bubbles," Journal of Economic Perspectives, American Economic Association, vol. 4(2), pages 35-54, Spring.
  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. Rafael Rob, 1991. "Learning and Capacity Expansion under Demand Uncertainty," Review of Economic Studies, Oxford University Press, vol. 58(4), pages 655-675.
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Cited by:

  1. 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.
  2. Richard J. Sullivan & Zhu Wang, 2013. "Internet banking: an exploration in technology diffusion and impact," Working Paper 13-10, Federal Reserve Bank of Richmond.
  3. Fumiko Hayashi & Zhu Wang, 2009. "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.
  4. 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.

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