RAND Journal of Economics, Vol. 31, No. 1, pp. 43-61, 2000
This paper considers why consumers adopt new technology.
Policymakers wishing to encourage technology adoption can use different approaches. The variety of software that goes with hardware is a key factor.
Consumers choose to buy a new technology as a result of two factors, the price and the variety of products that work with it.
Factors that businesses and policymakers might use to increase the adoption of a new technology include hardware subsidies, developing software for the hardware, and making it work with older technologies (“backwards compatibility”).
“Network effects” mean that a product becomes more valuable to a consumer when there are more other users.
With CD players, network effects come from the fact that the (hardware) players are more valuable if more (software) disks work with them. This variety was a significant factors in adoption.
CD player technology was available to many firms, but only a few firms controlled the technology for making disks.