On the economics of technological substitution

Abstract

The purpose of this paper is to present a theory of substitution in which the substitution curve is derived from an underlying theory of competition between old and new technology. We show that the substitution curve can be analyzed in terms of two elements: (i) the determinants of thelong run niches for the old and new technologies; and (ii) the process of market creation and capacity expansion by which the new technology substitutes for the old. In the process we show how the relative outputs and relative prices of the products associated with old and new technologies are simultaneously determined. A logistic diffusion process for the new technology is shown to generate a logistic substitution curve along which the old displaces the new. Within this framework we are then able to conduct a number of comparative dynamic exercises in which differences in the properties of the old and the new technologies are translated into differences in the substitution curve.