Co-evolution of capabilities and preferences in the adoption of new technologies

Abstract

The objective of this paper is to propose a multidisciplinary approach for the analysis of demand and innovation. It combines insights from studies on technology diffusion, evolutionary economics and cognitive psychology to argue that consumption and demand are learning processes driven by trial-and-error, rather than by ex-ante maximisation. The paper presents a heuristic synthesis to incorporate learning processes in the determination of consumption preferences and capabilities. The case of banking service innovation in the UK is presented as an illustrative example of the outlined dynamics.

Keywords:

• demand
• innovation
• consumer behaviour
• learning

Acknowledgements

The author wishes to thank Cristiano Antonelli, Franco Malerba, Stan Metcalfe, Dale Southerton and Francesco Quatraro for insightful comments provided during various stages of the development of this manuscript. A very early draft was presented at the DRUID Academy Winter Conference in Aalborg (Denmark) in January 2004, on which occasion I benefited of the comments by Edward Steinmueller and Giampaolo Garzarelli. I also thank the editor and the anonymous referees of this journal for constructive comments. The collaboration of APACS, the UK payments association, for having kindly provided supplementary statistics is gratefully acknowledged. The usual disclaimer applies.

Notes

1. On the determinants of technology diffusion see Metcalfe (2005) and Antonelli (2006). On evolutionary approaches to consumption, see Bianchi (1998). On experimental psychology and consumption see Herrnstein and Prelec (1991), and Metcalfe (2001a). For more in general on the relationship between consumption and innovation, see Schmookler (1966), Rogers (1962), von Hippel (1988), Swann (1999), Witt (2001).

2. See O'Driscoll and Rizzo (1985). The implications of adopting a ‘real-time’ perspective are discussed in Leijonhufvud (2000); see also Loasby (1991).

3. See Bianchi (1998) and Loasby (1998). General references on evolutionary economics are: Metcalfe (2001b), and Nelson and Winter (2002).

4. See Loasby (1991), O'Driscoll and Rizzo (1985). The notion of real time bears obvious similarities with path-dependence as discussed by David (2001).

5. Menger (1950, 67). According to Menger, objects can be placed in connection to human needs if four prerequisites are satisfied (see p. 52): a human need; causal connection between goods and the need; human knowledge of this causal connection; sufficient command of the thing (sic) to satisfy the need. ‘The idea of causality, however, is inseparable from the idea of time. A process of change involves a beginning and a becoming, and these are only conceivable as processes in time.’ Similarly, argues Lachmann (1977, 92) ‘Time and knowledge belong together.… As long as we permit time to elapse we must permit knowledge to change, and knowledge cannot be regarded as a function of anything else.’

6. See Menger (1950, 56): ‘The bread we eat, the flour from which we bake the bread, the grain that we mill into flour, and the field on which the grain is grown – all these things are goods. But knowledge of this fact is not sufficient for our purposes. On the contrary, it is necessary in the manner of all other empirical sciences, to attempt to classify the various goods according to their inherent characteristics, to learn the place that each good occupies in the causal nexus of goods, and finally, to discover the economic laws to which they are subject.

7. The heuristic covers some points recently discussed in Malerba (2007).

8. Here we elaborate on previous work (Metcalfe 2001a).

9. The figure thus shows the negative effects of externalities discussed before as a result of congestion beyond a critical mass of adopters ˆ n.

10. In relation to this point see the work by Cowan, Cowan, and Swan (1997). The authors associate types of consumption choices to the existence of reference groups: a peer group of similar consumers, a contrast group and an ‘aspirational’ group.

11. Arguably, if increasing returns are at work, the plan of intertemporal choices made by agents will affect also habit formation and the way consumption capabilities are learned. See Pollack (1970). These considerations may be further extended to include the impact of such changes in consumption behaviour including the emergence or the modification of a lifestyle. See Earl (1986) on this.

12. The analysis of consumption practices is a staple of the sociology of innovation. See Granovetter (1985) and Warde (2005).