Transcript Slide 1
Economics 124/PP 190-5/290-5
Innovation and Technical
Change
Diffusion of innovations
Prof. Bronwyn H. Hall
Outline – Diffusion (Oct. 26,28)
Introduction
Economic determinants of diffusion
Overview of some models
Factors affecting the pace of diffusion
Example: the dynamo and the
computer
Fall 2004 (C) B H Hall
Econ 124/PP 190-5/290-5
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Diffusion
Dictionary definition: The spread of linguistic
or cultural practices or innovations within a
community or from one community to
another
Course definition: The spread of an
innovation throughout the economy or the
relevant set of potential users – examples:
Almost all consumers – TV, indoor plumbing
ATM machines – banks and retail stores
Sometimes referred to as “adoption”
When looked at from the point of view of individual
choice by consumers or firms
Fall 2004 (C) B H Hall
Econ 124/PP 190-5/290-5
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The historical view
“in the history of diffusion of many
innovations, one cannot help
being struck by two characteristics
of the diffusion process: its
apparent overall slowness on the
one hand, and the wide variations
in the rates of acceptance of
different inventions, on the other.”
(Rosenberg, 1976, p. 191).
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Econ 124/PP 190-5/290-5
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The s-curve for diffusion
Shows how the number of users of a new technology
grows over time (usually measured as a share of
potential users).
Begins trending upward very slowly
At some point becomes much steeper (as the
technology spreads rapidly)
Eventually flattens out because there are fewer and
fewer potential users that have not already adopted
Graph shows the diffusion of some major consumer
inventions in the United States during the past 100
years.
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U.S. diffusion of major inventions
100
90
80
Telephone
Share (%)
70
Refrigerator
60
Washing machine
50
40
VCR
30
20
10
0
1900
Electric Service
1910
1920
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1930
1940
1950
Year
1960
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1970
1980
1990
2000
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Bottom-up view
Adoption from the point of view of
adopter:
Investment under uncertainty
Once done, costs are sunk
Like an option
Adoption from the point of view of the
innovator or supplier:
Marketing goal – reaching a new customer
Focus on network effects, either
technological or social
Fall 2004 (C) B H Hall
Econ 124/PP 190-5/290-5
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Top-down view
Channel from innovation to economic growth
mediated by diffusion, which can be
surprisingly slow
need to understand process to understand why
Some examples
Diffusion of electricity required complete factory
redesign; infrastructure
Diffusion of computing technology and internet
Productivity growth sometimes surges 20-30
years after initial introduction of new general
purpose technology (GPT)
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Econ 124/PP 190-5/290-5
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Economic determinants
The adoption decision will depend on
the factors that usually affect
investment decisions:
Benefits
Costs
Risk and uncertainty/information
Environment and institutions – market
and/or regulatory
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Econ 124/PP 190-5/290-5
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Benefits depend on
Closeness of substitute technologies
Radio versus automatic clotheswasher
Mobile and landline telephones
Networks and standards (more later)
ATM adoption by banks
VHS/Beta
Wireless computing and 802.11b
Experience and Learning
Investment in adopter skills
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Costs depend on
Price of new technology
Complementary investments
Infrastructure and other capital equipment
Training/skills
Scale
Due to fixed cost nature of adoption in many
cases
Mechanical reaper in 19C (David on UK)
Cost of finance
Large body of literature on innovation
investment where there is uncertainty
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Uncertainty/information
New technology – less understood, more
uncertainty about how well it works
Uncertainty about whether it will be
successful (standards)
Benefits are a flow, costs are upfront =>
benefits may be more uncertain
The option to delay decision in order to
acquire more information may cause delay
in adoption
Luque (2002) – new manufacturing technology
adopted more quickly in industries with lower
sunk costs, lower uncertainty
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Environment – market structure
Size and/or market power of adopters:
Accelerates diffusion
Scale economies
Delays diffusion
Slower and less flexible
Size and/or market power of suppliers:
Accelerates diffusion
Sponsoring a standard (e.g., IBM and the personal
computer) – mobile telephone evidence
Delays diffusion
Higher prices
Less fear of market share loss to entry (see ATT in
1960s)
Fall 2004 (C) B H Hall
Econ 124/PP 190-5/290-5
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Environment - regulatory
Accelerates adoption
mandates pollution or safety standards
solves coordination problems in network
industries
Delays adoption
Safety regulation, e.g., new pharmaceuticals
and medical instruments, PVC pipe
Standard-setting process - telecommunications
(ATT again)
New California law and lighting innovation?
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Some empirical examples
Date Authors
Technology
1957
1968
1975
1984
1995
hybrid corn
diesel locomotives
mechanical reaper
ATMs
ATMs
Griliches
Mansfield
David
Hannan/MacDowell
Saloner/Shepard
1995 Helper
Observations Factors
Midwest farms
US railways
US,UK farms
US banks
US banks
US auto
CNC machine tools component firms
1997 Kennickell/kwast
electronic banking US consumers
Majumdar/Vankatara
1998 man
elec switching tech US telecomms
1998 Gray/Shadbegian
new tech in paper US paper plants
1998 Hubbard
on-board IT
2000 Stoneman/Toivanen
robot technology
2001 Caselli/Coleman
computers
2001 Gruber and Verboven mobile telephones
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US trucking
firms crosscountry
profitability; need to specialize product
liquidity (financial factors)
minimum efficient scale
regulation; concentration;firmsize;holding co. (risk);cost of
network size;customer deposits (size)
prod worker wage;tech complexity;size;stable customer
relationshp
education; assets; learning (older services versus newer)
network effect and scale (weaker over time)
environmental regulation
on-time benefits;stable customer relationship - helps
monitoring
real options; volatility in uncertain investments?
education level of workers;openness;overall investment
OECD countries rate
European
consumers
concentration of providers;tech improvements
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Models – the s-curve
Heterogeneous adopters
Benefits have a unimodal distribution
Costs decline monotonically
Adopt when benefit>cost
Epidemics (spread of information)
Small share adopt
They encounter the remainder randomly; those
contacted adopt
Implies 3-parameter logistic
Both models => s-shaped curve for diffusion
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Econ 124/PP 190-5/290-5
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Models - sunk costs
Adoption is investment under uncertainty
Compare an upfront cost with a stream of future
benefits
=>adoption an absorbing state in the sense that
once costs incurred, they are sunk
Decision is
Not “adopt or do not adopt”
But instead “adopt now or wait to decide later”
Real options models (Stoneman 2001)
Uncertain payoff is modelled as a stochastic process
If it reaches a high enough value (strike price), the
option to invest is exercised.
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Econ 124/PP 190-5/290-5
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Internet diffusion in Econ 124
Computer ownership:
1997, 80% of class
2003, 100% of class
Internet use 1997 to 2003
Total use increased
Recreational use relatively more important in
2003
More classwork done at home
Web surfing increased more than email
University service improved a lot
=> WTP (Willingness To Pay) decreased
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Hours Per Day Online
Economics 124 Students
25
20
Number
15
10
5
0
0
<1 hour
1 to 2 hours
2-3 hours
>3 hours
Rating
1997
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Hours Per Day Email for Class
Economics 124 Students
45
40
35
Number
30
25
20
15
10
5
0
0
<1 hour
1 to 2 hours
2-3 hours
>3 hours
Rating
1997
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Hours Per Day Web for Class
Economics 124 Students
35
30
Number
25
20
15
10
5
0
0
<1 hour
1 to 2 hours
2-3 hours
>3 hours
Rating
1997
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Rating UC Berkeley Online Service
Economics 124 Students
30
25
Number
20
15
10
5
0
NA
Very poor
Poor
Fair
Good
Excellent
Rating
1997
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Willingness-to-pay for Online Access
Economics 124 Students
40
35
30
Number
25
20
15
10
5
0
Nothing
<$5 per month
$5-9.99 per mo
$10+ per mo.
Rating
1997
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