Working Paper: CEPR ID: DP2078
Authors: Neil Gandal; Michael Kende; Rafael Rob
Abstract: In this paper we examine the diffusion of a hardware/software system. For such systems there is interdependence between the hardware adoption decisions of consumers and the supply decisions of software manufacturers. Hence there can be bottlenecks to the diffusion of the system which stem not from high prices but from the fact that the complementary product is not available. We consider the CD-industry and estimate the (direct) elasticity of adoption with respect to CD prices and (the cross) elasticity with respect to the variety of CD-titles.Our results show that the cross elasticity is indeed significant so that the presence of complementarities poses a serious bottleneck problem for the diffusion of the base product. We illustrate two applications of our methodology: (i) the business-policy question of how to subsidize a new base product which is contingent on a sufficiently large supply of complementary products & (ii) the public-policy question of what are the benefits of imposing backward compatibility on a new technology (e.g., high definition televisions).
Keywords: technological adoption; complementary products; empirical study; compact discs
JEL Codes: K2; L80
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Price of CD players (E39) | Adoption of CD players (O39) |
| Variety of CD titles available (Y92) | Adoption of CD players (O39) |
| Cross elasticity of CD titles to own price elasticity (C29) | Adoption of CD players (O39) |
| Availability of complementary products (L15) | Diffusion of CD players (L15) |
| Supply of CD titles (D39) | Adoption of CD players (O39) |
| Strategies enhancing software availability (L17) | Hardware adoption (L63) |
| Complementary software production integration (L17) | Hardware adoption (L63) |
| Backward compatibility considerations (Y20) | System adoption (O33) |