Sooner or Later? The Role of Adoption Timing in New Technology Introduction

Abstract

M otivated by several industry examples, we study the interaction between a technology provider introducing a new technology and downstream manufacturers adopting the new technology into their products. The manufacturers, once decided on their adoption timing, both cooperate in making demand-boosting investments to promote the technology and compete in price in the product market. Our main objective is to explore the important question of how the technology provider manipulates manufacturers' adoption timing. We develop a stylized continuous-time multi-stage game-theoretic model with one technology provider and two downstream manufacturers, and derive pure-strategy equilibria for the manufacturers and the technology provider. We find that in the absence of the technology provider's intervention, in equilibrium there is simultaneous adoption when the market competition is relatively mild, and sequential adoption otherwise. In particular, under the sequential-adoption equilibrium, the second manufacturer strategically postpones adoption in order to freeride on the first manufacturer's demand-boosting investment. We show that manufacturers' equilibrium adoption timing is not always in line with the technology provider's interest. To align these different preferences, we suggest that when the competition is in a relatively mild region, the technology provider can make an initial investment to incentivize both manufacturers to adopt the technology early, whereas when the competition is relatively intense, an exclusive period should instead be offered to one manufacturer to keep the other from adopting the technology early. Interestingly, these self-interested interventions often improve the efficiency of the system. Finally, we show that our main findings remain robust when we assume that the effect of manufacturers' demand-boosting investments decreases over time, or when we allow the technology provider to optimize over the technology's licensing fee.