CARESS Working Paper 97-10 The Dynamics of Technological Adoption in Hardware/Software Systems: The Case of Compact Disc Players¤

In this paper we examine the dynamic resolution of technological adoption in \hardware/software" systems. We are interested in determining to what extent software availability a®ects hardware sales and/or vice-versa. We ̄st develop a dynamic model for estimating demand when costs (and hence prices) are declining over time. We then estimate it empirically for the case of compact disc players. We ̄nd that there is \two-way" feedback between hardware and software for compact disc players. The result that the availability of compatible software (the CDs) plays a signi ̄cant role in determining the adoption of compact disc players is likely due in part to the fact that compact disc players were not compatible with any existing audio standard.