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Competing Technologies, International Diffusion and the Rate of Convergence to a Stable Market Structure

  • A. Bassanini
  • G. Dosi

This paper is motivated by two 'stylized facts' concerning the dynamics of diffusion of different technologies competing for the same market niche. a) A stable pattern of market sharing with no overwhelming dominant position is rarely observed in markets with network esternalities. Unbounded increasing returns to adoption are often called for an explanation of this fact. However the argument is generally based on an incorrect interpretation of the Brian Arthur (1990) model. As we show with a simple counterexample unbounded increasing returns are either necessary nor sufficient to lead to technological monopolies even in a stable external environment. b) International diffusion may lead sometimes to different standards in different countries ( the archetypal case is the diffusion of typewriter-computer keyboards - AZERTY vs. QWERTY) or to the diffusion of the same standard in every country (the archetypical example being VCRs - Beta vs. VHS), even without intervention of any regulatory agency. Intuitively when convergence to the same standard is not an accident of history, it is an outcome of the relative weight of international spillovers as compared to nationwide esternalities. The crucial question is: can a model that account for the former fact accommodate also the latter? In this paper, by establishing some mathematical properties of generalized urn schemes, we build on a class of competing technology dynamics models to develop an explanation for the former "fact" and to provide sufficient conditions for convergence to the same or to different technological monopolies in different countries. Our explanation for the empirical tendency to converge to technological monopoly relies on convergence rate differentials to limit market shares: We show that a market can approach a monopoly with a higher speed than it approaches any feasible limit market share where both technologies coexist. Convergence to market sharing, we conclude, is in general so slow that the environment changes before the market share trajectory becomes stable in a neighborhood of its limit. The empirical implication is that among markets with high rate of technological change and increasing returns to to adoption, a prevalence of stable monopolies over stable market sharing should be expected.

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Paper provided by International Institute for Applied Systems Analysis in its series Working Papers with number ir98012.

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Date of creation: Mar 1998
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Handle: RePEc:wop:iasawp:ir98012
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  1. Cowan, Robin, 1991. "Tortoises and Hares: Choice among Technologies of Unknown Merit," Economic Journal, Royal Economic Society, vol. 101(407), pages 801-14, July.
  2. Cowan, Robin, 1988. "Nuclear Power Reactors: A Study In Technological Lock-In," Working Papers 88-33, C.V. Starr Center for Applied Economics, New York University.
  3. S. J. Liebowitz & Stephen E. Margolis, 1994. "Network Externality: An Uncommon Tragedy," Journal of Economic Perspectives, American Economic Association, vol. 8(2), pages 133-150, Spring.
  4. Economides, Nicholas, 1996. "The economics of networks," International Journal of Industrial Organization, Elsevier, vol. 14(6), pages 673-699, October.
  5. Church, Jeffrey & Gandal, Neil, 1993. "Complementary network externalities and technological adoption," International Journal of Industrial Organization, Elsevier, vol. 11(2), pages 239-260, June.
  6. Erik Brynjolfsson & Chris F. Kemerer, 1996. "Network Externalities in Microcomputer Software: An Econometric Analysis of the Spreadsheet Market," Management Science, INFORMS, vol. 42(12), pages 1627-1647, December.
  7. Joseph Farrell & Garth Saloner, 1986. "Installed Base and Compatibility, With Implications for Product Preannouncements," Working papers 411, Massachusetts Institute of Technology (MIT), Department of Economics.
  8. Kaniovski Yuri M. & Young H. Peyton, 1995. "Learning Dynamics in Games with Stochastic Perturbations," Games and Economic Behavior, Elsevier, vol. 11(2), pages 330-363, November.
  9. Michael L. Katz & Carl Shapiro, 1994. "Systems Competition and Network Effects," Journal of Economic Perspectives, American Economic Association, vol. 8(2), pages 93-115, Spring.
  10. William A. Brock & Steven N. Durlauf, 1995. "Discrete Choice with Social Interactions I: Theory," Working Papers 95-10-084, Santa Fe Institute.
  11. Katz, Michael L & Shapiro, Carl, 1986. "Technology Adoption in the Presence of Network Externalities," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 822-41, August.
  12. Dosi, Giovanni & Ermoliev, Yuri & Kaniovski, Yuri, 1994. "Generalized urn schemes and technological dynamics," Journal of Mathematical Economics, Elsevier, vol. 23(1), pages 1-19, January.
  13. Heli Koski, 1999. "The Installed Base Effect: Some Empirical Evidence From The Microcomputer Market," Economics of Innovation and New Technology, Taylor & Francis Journals, vol. 8(4), pages 273-310.
  14. Dosi, Giovanni, 1997. "Opportunities, Incentives and the Collective Patterns of Technological Change," Economic Journal, Royal Economic Society, vol. 107(444), pages 1530-47, September.
  15. Katz, Michael L & Shapiro, Carl, 1992. "Product Introduction with Network Externalities," Journal of Industrial Economics, Wiley Blackwell, vol. 40(1), pages 55-83, March.
  16. A. Bassanini, 1997. "Localized Technological Change and Path-Dependent Growth," Working Papers ir97086, International Institute for Applied Systems Analysis.
  17. Joseph Farrell & Garth Saloner, 1985. "Standardization, Compatibility, and Innovation," RAND Journal of Economics, The RAND Corporation, vol. 16(1), pages 70-83, Spring.
  18. David, Paul A, 1985. "Clio and the Economics of QWERTY," American Economic Review, American Economic Association, vol. 75(2), pages 332-37, May.
  19. Banerjee, Abhijit V, 1992. "A Simple Model of Herd Behavior," The Quarterly Journal of Economics, MIT Press, vol. 107(3), pages 797-817, August.
  20. Katz, Michael L & Shapiro, Carl, 1985. "Network Externalities, Competition, and Compatibility," American Economic Review, American Economic Association, vol. 75(3), pages 424-40, June.
  21. Bernheim, B Douglas, 1994. "A Theory of Conformity," Journal of Political Economy, University of Chicago Press, vol. 102(5), pages 841-77, October.
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