01/12/2013
The Speed of Technological Adoption Under Price Competition: Two-Tier Vs One-Tier Industries

The Speed of Technological Adoption Under Price Competition: Two-Tier Vs One-Tier Industries

The present paper examines the firms' incentives to adopt a new cost reducing technology in vertically related markets, as well as, the effects of the vertical relations on the firms' timing of adoption.

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It is well established that technological innovation, as well as, the timing of the adoption and the diffusion of a new technology are fundamental determinants of economic development and growth, since they crucially affect the markets' performance, productivity and efficiency (Krugman, 1994). However, theoretical and empirical studies suggest that the speed of the technology adoption differs significantly not only, across nations but also, across similar firms and industries, since the firms' incentives to adopt a new technology, as well as, the timing of the adoption crucially depend on the market features such as, the market structure, the intensity of the market competition, the marketís power distribution, etc. (see e.g., Klette, 1996; Klenow and Rodriguez-Clare, 1997; Griliches, 1998; Sutton, 1998; Hall and Jones, 1999; Gotz, 1999; Caselli, 2005; Klette and Kortum, 2004; Milliou and Petrakis, 2011). According to empirical observations (see e.g., Lane,1991; Charlsson and Jackobsson1994; Helper 1995) the vertical relations in a market such as the customers/suppliers relations, a§ect significantly the firms' decisions to adopt a new technology with closer relations and "relational contracting" to enhance the incentives of technology adoption.

In this paper, we investigate the firms' incentives to adopt a new cost reducing technology in vertically related markets under alternative upstream market structures (i.e., upstream separate firms market structure, upstream monopolistic market structure), as well as, the effects of the vertical relations on the firms' timing of the technology adoption. In particular, the present paper aims to answer the following three questions. First, are there any downstream firms' incentives to adopt a new cost reducing technology in vertically related markets? Second, how does the timing of the technology adoption differs between alternative industry structures (i.e, one-tier vs. two-tier industries)? Third, how do the different upstream market structures (i.e., upstream monopoly vs. upstream separate firms market structure) affect the speed of the technology adoption? 

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