Neoclassical theory of durable good diffusion
Abstract
Existing studies that deal with the diffusion of durable good innovations have been justifiably criticized for their common lack of an explicit testable theory of new product growth. This paper attempts to remedy this situation by providing a theoretical model of market penetration of new durable goods that is derived from the basic assumption that potential users of the new intermediate product attempt to minimize the discounted costs of production over time. The resulting model defines a time path of short-run equilibrium market shares that are determined by the cost characteristics (capital cost and operating and maintenance expenses) of both the new innovation and the equipment that it is designed to replace, the age distribution of the existing capital stock, and the growth rate of the adopting sector. This model is shown to exhibit several attractive features lacking in existing models of the diffusion process. First, it yields a number of testable hypotheses, some of which have received indirect empirical support in previous studies on the subject. Second, it is operational in the absence of historical data on the market experience of the new good under investigation. And third, it is capable of generating, on the basis of such ex ante information, the complete range of functional forms used in prior models to represent the relationship between market share and elapsed time since introduction of the new innovation. These features render the model inherently superior…
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