The Diffusion of New Technology and the Market for an Innovation

This article shows that the diffusion of a capital-embodied process innovation results from a pattern of decreasing incremental benefits and adoption costs for later adoptions. Strategic behavior is inessential to this finding. We develop a method for comparing diffusion rates for different market structures in the capital equipment market. We consider cases with market power on the seller's side of the market and on the buyers' side of the market, a case with no market power, and the welfare-optimal case. We find that a joint venture adopts an innovation more slowly than other market regimes to protect existing capital investments and that the adoption rate is slower than is socially optimal. A monopoly supplier, on the other hand, adopts at a rate faster than is socially optimal. This result is usually also the case when there is no market power. Finally, we show that the monopoly supplier accelerates adoptions faster than in the case where there is no market power, but retards later adoptions. Market power thus makes a difference in diffusion rates, and on which side of the market that power lies makes a considerable difference.