Information Technology, Growth and Welfare: An Economic and Engineering Analysis of Wavelength Division Multiplexing

The purpose of this paper is to look at a recent technology of information transmission in the fiber optics area. The technology in question is known as WDM or wavelength division multiplexing. The engineering aspects known to us and discussed in the next section already indicate tremendous potential for both producers and consumers. However the integration of an engineering analysis with an economic analysis will be crucial for estimating the possible paths of diffusion and the costs and benefits for the society of this new technology. Our discussion of the requirements of technical progress shows that we need both a deeper understanding of the disequilibrium processes at work leading towards multiple equilibria, and the economic implications of the complexities of the production and distribution aspects of WDM. With the existence of increasing returns to scale and stable input prices there is a real possibility of lowering price progressively by serving ever-larger markets. Thus the diffusion of WDM and similar technologies can occur quite rapidly if the firms produce with economies of scale in the face of adequate and expanding effective demand. This implies that the optimal competition will occur with a few large-scale firms under strict enforcement of anti-monopoly laws in order to approximate Bertrand competition. Under such circumstances prices will match closely social marginal cost of production. Smooth production and marketing schedules will mean that the logistic curve for diffusion will display a high rate of growth initially. This leads us to predict that under such market conditions, which are approximated in the US, both WDM and OTDM will diffuse quickly if adequate initial effective demand is present. Consequently, social welfare from the diffusion of technologies can be expected to increase quite rapidly. The economic analysis is carried out within a coherent nonlinear model of complex innovation systems called POLIS or positive feedback loop innovation system.