Disruptive Technologies and the Emergence of Competition

We formalize the phenomenon of disruptive technologies that initially serve isolated market niches and, as they mature, expand to displace established technologies from mainstream segments. Using a novel model of horizontal and vertical di®erentiation with discrete customer segmentation, we show how the emergence of technology competition depends on numerous factors including the number of ̄rms using each technology, the size of the di®erent market segments, the trajectory of technological advance, and the extent to which consumers have decreasing marginal utility from product improvements. Our theory suggests a richer and more dynamic approach to market de ̄nition than the static analysis of substitution usually employed in antitrust deliberations. ¤Both authors are at INSEAD.