Snobby markets and technology adoption

ABSTRACT

We study how snob consumption externalities (SCEs) affect the adoption of a new technology in a vertically differentiated duopoly. We show that the leader firm does not adopt when SCEs are medium or high. From a social viewpoint, medium SCEs lead to excessive inertia (the leader firm should adopt, but it does not), and high SCEs lead to reverse adoption (the adopter is the wrong firm). Lower SCE thresholds emerge when the innovative step is large. Our findings suggest that selective policies must be implemented to increase market efficiency, including discouraging adoption.

KEYWORDS:

• Technology adoption
• technological differentiation
• vertical product differentiation
• brand
• snob consumption externalities

Acknowledgments

Previous versions of this paper were presented at the CISS Summer School, at the 13th IOCC Conference, at the DRUID17 Conference, and at the University of Turin. We wish to thank Claire Chambolle for her useful suggestions. The usual disclaimer applies.

Disclosure statement

No potential conflict of interest was reported by the authors.

ORCID

Marco Alderighi http://orcid.org/0000-0002-2001-5678

Christophe Feder http://orcid.org/0000-0002-1239-513X

Notes

1 For a review on the link between technology adoption and consumer behavior, see Kremer, Rao, and Schilbach (2019) and Weber and Kauffman (2011).

2 The first quartz movement was patented by a US producer in 1928, although its economic development was limited because of the high costs of semiconductor technology until the 1960s.

3 We do not model the research and developing processes which led to the new technology τ, and we only focus on the determinants of the adoption and the diffusion processes (Milliou and Petrakis 2011).

4 This modeling choice is quite common in innovation studies (Huang et al. 2013; Castaldi 2018).

5 To simplify the notation, we do not explicitly show the dependence of the variables on $p_A$ and $p_B$.

6 Intuitively, for small values of m, the number of consumers who want to buy the product are greater than m, and therefore this is not the consumers' equilibrium. Similarly, for large values of m, the number of consumers is too small. By continuity and monotonicity, there exists only one m for which there is a unique equilibrium.

7 Other authors have noted that technological differentiation may reduce the market competition and increase profits (Belleflamme 1998; Kim et al. 2018).

8 Note that: ${\theta }_A=\tau$, and ${\theta }_B=\tau$ and 1, respectively, when Firm B adopts or not.

9 In the absence of adoption, its profits are null, while they are nonnegative when it adopts.