Cost-Reducing Technology Provision and Adoption - An Equilibrium Approach

Abstract We study a framework where firms have the possibility to adopt a technology that reduces marginal cost. The technology may be protected by a patent or it may be competitively supplied, reflecting a situation where the patent has expired. The same technology is available to all firms such that the decision to acquire it is influenced by the number of competitors that adopt the technology. Firms end up making different decisions, which leads to varying adoption rates as an equilibrium outcome, thus providing a rationale for an endogenously determined size distribution of firms. Too little adoption does not occur in equilibrium, except when markets are highly concentrated. Excessive adoption is more likely to occur under perfectly competitive supply than under monopolistic supply of the technology. Increases in demand, a lower degree of price sensitivity and a higher marginal cost reduction rate of the technology strengthen both private and social incentives for adoption. A reduction in the degree of market concentration leads to lower adoption rates, both in equilibrium and under the socially optimal outcome .