The Diffusion of Product Innovations and Market Structure

In this paper I analyze the diffusion of a product innovation that was recently made available for licensed purchase within an industry with identical firms producing the same good.  The main assumptions are a decreasing yet always positive incentive to adopt the innovation, and an extremely high cost of immediate adoption, but which decreases over time passed since the innovation has become available.  The resulting equilibrium in the industry is a gradual adoption of the innovation rather than an immediate one, with each firm having an optimal time of adoption.  In the long-run equilibrium, as the number of firms in the industry becomes very large, it is also shown that the incentive to innovate does not disappear.  However, as the number of firms in the industry increases each firm is shown to have an incentive to adopt earlier.  The assumptions here, as well as the results of this model, match the results of recent studies in the empirical literature.

Keywords: product innovation, long-run equilibrium, model

JEL Classification: D21, D50