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Monopoly, Diversification through Adjacent Technologies, and Market Structure


  • Karaaslan, Mehmet E.


The theoretical literature on technological competition has been mostly concerned with various aspects of innovative activity in a single market. By contrast, this paper studies the adoption of a sequence of product innovations in two markets characterized by a common technology base, and illustrates the effects of technological rivalry and preemption. Under a perfect information scenario, it is shown in a two incumbent model that if the innovation is drastic (total replacement of the old product), under certain conditions the fear of being preempted by the entrant forces the firms to diversify their product lines by adopting the innovations across each other's markets. On the other hand, with non-drastic innovation (partial replacement of the old product), it is more likely for the firms to diversify in their own product lines. Out of a class of equilibria characterized under non-drastic innovation, one is optimal in which innovations are adopted in the firms' own markets. In the Pareto inferior equilibria, the firms either adopt innovations in each other's market so that incumbency changes hands or jointly adopt both innovations in two separate product lines. Perfect Bayesian equilibria are characterized under an asymmetric information scenario where one of the firms is assumed to have complete information about the relevant costs of adopting an innovation in a separate product line. If the priors are based on pessimism, it is more often subject to exploitation by the informed firm leading to pooling equilibrium, while optimistism more often leads to diversification and to a competitive market structure in both product lines under a separating equilibrium. In all the cases considered, both innovations are adopted, and in most cases they are adopted by the high cost entrant. The former is socially desirable, but the latter is not. More competitiveness necessarily implies wasteful expenditure by the high cost firm. Lack of competitiveness and technological rivalry, on the other hand, imply that maximum product diversity may not be achieved.

Suggested Citation

  • Karaaslan, Mehmet E., 2007. "Monopoly, Diversification through Adjacent Technologies, and Market Structure," MPRA Paper 7607, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:7607

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    References listed on IDEAS

    1. McLean, Richard P. & Riordan, Michael H., 1989. "Industry structure with sequential technology choice," Journal of Economic Theory, Elsevier, vol. 47(1), pages 1-21, February.
    2. Kenneth Arrow, 1962. "Economic Welfare and the Allocation of Resources for Invention," NBER Chapters,in: The Rate and Direction of Inventive Activity: Economic and Social Factors, pages 609-626 National Bureau of Economic Research, Inc.
    3. Kamien, Morton I & Schwartz, Nancy L, 1975. "Market Structure and Innovation: A Survey," Journal of Economic Literature, American Economic Association, vol. 13(1), pages 1-37, March.
    4. Harris, Christopher J & Vickers, John S, 1985. "Patent Races and the Persistence of Monopoly," Journal of Industrial Economics, Wiley Blackwell, vol. 33(4), pages 461-481, June.
    5. Vickers, John S, 1986. "The Evolution of Market Structure When There Is a Sequence of Innovations," Journal of Industrial Economics, Wiley Blackwell, vol. 35(1), pages 1-12, September.
    6. Bhattacharya, Sudipto & Chatterjee, Kalyan & Samuelson, Larry, 1986. "Sequential Research and the Adoption of Innovations," Oxford Economic Papers, Oxford University Press, vol. 38(0), pages 219-243, Suppl. No.
    7. Gilbert, Richard J & Newbery, David M G, 1982. "Preemptive Patenting and the Persistence of Monopoly," American Economic Review, American Economic Association, vol. 72(3), pages 514-526, June.
    8. Jennifer F. Reinganum, 1981. "Market Structure and the Diffusion of New Technology," Bell Journal of Economics, The RAND Corporation, vol. 12(2), pages 618-624, Autumn.
    9. Posner, Richard A, 1975. "The Social Costs of Monopoly and Regulation," Journal of Political Economy, University of Chicago Press, vol. 83(4), pages 807-827, August.
    10. Glazer, Amihai, 1985. "The Advantages of Being First," American Economic Review, American Economic Association, vol. 75(3), pages 473-480, June.
    11. Hannan, Timothy H & McDowell, John M, 1987. "Rival Precedence and the Dynamics of Technology Adoption: An Empirical Analysis," Economica, London School of Economics and Political Science, vol. 54(214), pages 155-171, May.
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    More about this item


    tehnological rivalry; preemption; adoption of innovations; upgrading;

    JEL classification:

    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives

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