Author(s)
Neil Gandal and Michael Kende
Source
RAND Journal of Economics, 31, 2000, pp. 43-61.
Summary
This paper considers why consumers adopt new technology.
Policy Relevance
Policymakers wishing to encourage technology adoption can use different approaches. The variety of software that goes with hardware is a key factor.
Main Points
- 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.
