Chapter 2 taught us how to compute the network sizes when brandproducing firms compete in prices and consumer preferences exhibit network externalities. Our main assumptions in Chapter 2 were that the technologies were given to the firms (i.e., the firms could not choose or update their technologies), and that governments did not intervene.

In this chapter we depart from these assumptions. Section 4.1 analyzes how firms choose their technologies. Section 4.2 departs from the static nature of our modeling and analyzes the frequency of newtechnology adoption in an environment when innovation is constantly undertaken. Section 4.3 analyzes the world market, where we ask whether governments benefit from recognizing the standards used in the production and design of products produced abroad.

New Technology Adoption: A Static Approach

It is widely acknowledged that a radical technology change requires (or, actually is defined by) a complete redesign of the product, its features, and even its function. When facing a technological revolution, the first question that comes to mind is whether the new technology will be adopted given the large installed base of the existing inferior technology, see Farrell and Saloner (1985, 1986), and Katz and Shapiro (1992, 1986), Cabral (1990), Choi (1996), and Choi and Thum (1998).

Consumers and producers face constant technology changes in every part of their lives. LP (long-play) records have been replaced by a digital CD (compact-disk) technology. Video cassettes are replaced by DVDs (digital video disks). Cellular phones replace the wire technology in Scandinavian countries. Internet services replace some stores and libraries.