Disruption costs, learning by doing, and technology adoption

Abstract

We study technology adoption in a dynamic model of price competition. Adoption involves disruption costs and learning by doing. Because of disruption costs, the adopting firm begins in a market disadvantage, which may persist if its rival captures the customers that the adopting firm needs to learn the technology. The prospect of future rents by the rival results in: (i) a failure to adopt socially efficient technologies; (ii) an equilibrium preference for technologies that are learned faster but have lower social value; and (iii) more technologies being adopted if more firms enter the market.