MERIT-Infonomics Research Memorandum series Technological diffusion, welfare and growth: technological succession in the presence of network externalities

The paper examines the conditions under which technological successions can occur in the presence of network externalities. A multi-agent model is developed in which the product designs offered by firms co-evolve with consumer preferences. Firms compete though product innovation. The model incorporates a modified genetic algorithm (GA) in which imitation is conducted via a process of selective transfer (a one-way crossover) and internal R&D is conducted via selective mutation. Following an initial period in which old technology firms develop their designs and network externalities accrue, a technological shock occurs in which new technology-based firms enter the market. The findings of the model indicate that a necessary condition for a technological succession are the existence of at least one consumer group that champions the new technology, developing new preferences for its characteristics. Further, the introduction of novel characteristics are have a greater bearing on the probability of a succession than incremental gains in characteristics offered by the old technology. Third, the analysis identifies an inverse relationship between time the probability of a technological succession.