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Adoption is not development: first mover advantages in the diffusion of new technology

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The diffusion of new technology among competing firms is of long-standing interest in industrial organization. There is an extensive theoretical literature on technology adoption in which firms can instantaneously deploy a new technology in the market at a cost that is exogenously falling over time. While such models explain diffusion (firms adopt asynchronously), Fudenberg and Tirole (1985) show that the incentives to preemptively adopt in subgame perfect equilibria can cause rents to be equalized across firms. In contrast, we study technology development where costly and time consuming effort is required to deploy a new technology. With diminishing returns to instantaneous effort, delaying deployment reduces the firm's costs, as in adoption models. However, the incentive to preempt is lower: with its development already partially complete, a preempted firm delays deployment less than with adoption. We provide reasonable conditions under which the subgame perfect equilibrium outcome corresponds to that in the pre-commitment equilibrium first proposed by Reinganum (1981a, 1981b), yielding both diffusion and first mover advantages for the case of technology development.

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en

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application/pdf

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http://flora.insead.edu/fichiersti_wp/inseadwp2007/2007-03.pdf

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Copyright INSEAD. All rights reserved