Technology Adoption and Product Differentiation: Market-Level Effects

Abstract

The focus of the microeconomic technology adoption literature has been on the adoption and diffusion of new innovations: who adopts, and when they adopt. Implicit in the literature is that consumers will embrace the product that results from the use of the new technology. If producers have reason to believe that adopting a new technology may lead consumers to perceive differentiated products, then the decision of whether or not to adopt needs to consider not only the effectiveness of the new technology but also the consumer response to it. That is, producers have to incorporate the impact of consumer-driven market-level effects into their technology choice decisions. In these situations, producers considering the adoption of a new agricultural biotechnology have a more complex learning problem than the technology adoption literature generally addresses, because producers need to consider the interaction of demand and supply effects from the adoption of any new technology. We motivate our analysis with the case of recombinant bovine somatotropin (rbST). In order to address some of these issues, we construct an analytical model of technology adoption that considers a market with differentiated goods. We develop a multi-period economic model of a representative farmer’s technology choice decision and integrate it into a market-level analysis that links the industry’s use of the technology to the structure of consumer demand. The focus of the microeconomic technology adoption literature has been on the adoption and diffusion of new innovations: who adopts, and when they adopt. Implicit in the literature is that consumers will embrace the product that results from the use of the new technology. If producers have reason to believe that adopting a new technology may lead consumers to perceive differentiated products, then the decision of whether or not to adopt needs to consider not only the effectiveness of the new technology but also the consumer response to it. That is, producers have to incorporate the impact of consumer-driven market-level effects into their technology choice decisions. In these situations, producers considering the adoption of a new agricultural biotechnology have a more complex learning problem than the technology adoption literature generally addresses, because producers need to consider the interaction of demand and supply effects from the adoption of any new technology. We motivate our analysis with the case of recombinant bovine somatotropin (rbST). In order to address some of these issues, we construct an analytical model of technology adoption that considers a market with differentiated goods. We develop a multi-period economic model of a representative farmer’s technology choice decision and integrate it into a market-level analysis that links the industry’s use of the technology to the structure of consumer demand.