The Dynamics of Innovation and Diffusion with Competing Techniques

Conventional economic theory usually assumes that information about new technologies and products is a kind of public good that can be costlessly and timelessly acquired. Accordingly, best-practice techniques are considered to be instantaneously adopted and implemented by existing firms. Much recent literature has departed from this view and regards the process of innovation and diffusion as more complex. Technological change, it is argued, takes place under conditions of competing technologies and imperfect (or only locally available) information, with innovation or diffusion costs for the new technology, returns to scale in adoption and learning, and high risk and uncertainty for the innovating firms. These conditions admit a wide range of outcomes in which the best and most efficient techniques do not always corner the market. These new approaches give a fresh and more realistic outlook to the study of innovation and diffusion processes. This chapter will identify three strands of this literature and will then utilize them to build a dynamic model of innovation and diffusion.