Models of Diffusion - SFG Internet Technologies Models of Technological Diffusion Stuart Fitz-Gerald

What inhibits diffusion? If a new technology is superior to previous technologies why do not all potential users of the new technology adopt it immediately?

Types of Innovation Product Innovations - advances in goods and services Process Innovations - advances in the technology of production

Another view of technology Information or knowledge production generates change Leads to consideration of the role of information or knowledge in the production process Generation of information is viewed as being endogenous to the diffusion process

Welfare Gains It is only as new technologies are used and spread widely in an economy that the real welfare gains arrive from those technologies To understand the diffusion process is to understand the process by which new technology generates these economic benefits (Stoneman 2001)

Technological Change - Home Updating technology or adding to its stock Rarely produced in-house

Technological Change - Industry R & D Learning by doing Licensing Buying new technology Producing in-house

Models of Diffusion Intra-firm diffusion Inter-firm diffusion Economy-wide diffusion International Diffusion

Models of Diffusion “The models we have used so far have been epidemic models”

Models of Diffusion In an intra-firm situation the uninfected parts of the firm of the firm are more likely to catch the disease (adopt) the more the firm has been infected (has adopted).

An Economic View The infectiousness of the innovation is determined by its financial characteristics (profitability and cost)

An Epidemic View Disease is spread by contact New technology will spread as individuals make contact with one another

The SARS Epidemic

Developing the models Griliches (1957) and Mansfield (1968) the early pioneers of the study of technological change and diffusion have used models which are variations on the epidemic theme. Let us look at these and others

Epidemic Intra-firm model This is just a variation of the classic model we have seen before.

Bayesian-learning model (1)  In this model users learn by experience  Firms face the choice of using old and new technology  Call  t the proportion of firm’s fixed output produced with the new technology in time t  The time path of  t is the diffusion path

Bayesian-learning model (2)  The entrpreneur learns about the new technology over time  The  t will change over time (as will  t *, the desired level of  t  This will be linked to the returns on old and new technology anticipated by the firm

Bayesian-learning model (3) The returns are distributed as follows: The firm learns about the nature of the technology and this impacts directly on adoption.

Epidemic Inter-firm model The classic model can be applied again with a slight change to the notation

The Probit Approach  This approach concentrates on the characteristics of the individuals within the sector  It is suitable for generating a diffusion curve  It also helps in the identification of late adopters

The Game Theoretic Approach  This approach is theoretical  It assumes the firms are identical and information perfect  The firm is assumed to maximise its present value and undertake strategic behaviour  Profit gained from adoption declines as number of adopters increases  Cost of adoption declines the later the technology is adopted  A Nash equilibrium exists

The Game Theoretic Approach DEFINITION: Nash Equilibrium If there is a set of strategies with the property that no player can benefit by changing her strategy while the other players keep their strategies unchanged, then that set of strategies and the corresponding payoffs constitute the Nash Equilibrium.

Economy-wide and International Diffusion  This is concerned with new technology over the national and international economy  Often restricted to major innovations which have economy-wide applications  Epidemic and probit models are used  Also Schumpeterian, vintage and stock- adjustment models

Economy-wide Diffusion  Schumpeter - investigation and analysis of long swings in economic activity  Vintage models - recognising the fact that at any point in time the economy is made up of equipment of different vintages. The putty/clay distinction is often used.  Rests on the distinction between desired and actual capital stock S* t and S t and the adjustment which takes place.

International Diffusion  The comparison of national diffusion across countries which extends the economy-wide models  The transmission of technology between countries which is true international diffusion  This raises the question why one country should use a new technology before another?

International Diffusion  Diffusion follows information  Information speeds the use of new technology, this could generate an epidemic of adoption  Characteristics vary between countries and above a certain threshold adoption is attractive. Education, government policy, transfer costs etc all impact on potential for adoption.

Diffusion of Internet Technologies  Do they have different characteristics to the conventional view of technology?  Should they diffuse more rapidly?  Are they independent?  Can we distinguish between product and process innovations?  Is the intra-firm, inter-firm, economy-wide and international diffusion notion useful for Internet Technologies  Which model best fits their characteristics?

Example Technologies  Java  XML  Biometric keys  Wireless Technology  Wikis  Middleware  IPv6  Web Services

Final Thoughts  Empirics  Summary and Conclusions