PERSISTENCE OF TECHNOLOGICAL LEADERSHIP: EMERGING TECHNOLOGIES AND INCREMENTAL INNOVATION

Authors


  • *I thank my advisors Joe Harrington and Peyton Young for their advice and encouragement. I would also like to thank Pat DeGraba, Dave Schmidt, Matt Shum, Frank Verboven, and two exceptionally helpful anonymous referees as well as Jim Porter (author of Disk/Trend), Clayton Christensen, and Henry Chesbrough for providing me with data. Any errors are my own. The views expressed in this article are those of the author and do not necessarily reflect those of the Federal Trade Commission.

Abstract

In a model of competitive innovation, I derive theoretical conditions for an entrant to displace the incumbent firm by innovating in an undeveloped, substitute (emerging) technology. The main result presents conditions on profitability and innovation speed that yield a Markov Perfect Equilibrium in which the entrant pursues the emerging technology, while the incumbent chooses to persist with the established technology and collect short-run profits. Notably, this result does not require the entrant's superiority to the incumbent for innovation. Finally, when the model is calibrated to hard drive industry data, its predictions are consistent with the observed outcomes.

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