Exercise Unit X

- Economics of Technological Diffusion 25.2.2016

Exam prep session

WS 15/16
Christian Oberst, Julius Frieling
Institute for Future Energy Consumer Needs and Behavior (FCN) /
Chair of Energy Economics and Management

Core Literature (obligatory)

Stoneman P. (2001): The Economics of Technological Diffusion
Blackwell Publishers, Oxford, ISBN-13: 978-0-631-21976-7
Topic Lecture/Excercise Unit

01. Introduction
02. Empirical Patterns
03. Basic Models I (Epidemic, Probit/Stock)
04. Basic Models II (Stock, Order, Bass)
05. Risk and Uncertainty
06. Risk and Uncertainty + Multiple
Technologies
07. The Supply Side
08. Adv. Diffusion Modeling Approaches I
09. Adv. Diffusion Modeling Approaches II
Spatial
10. Lead Markets
11. Policy and Financing Aspects + Patents
and Diffusion
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Economics of technological Diffusion |

C.Oberst, J. Frieling| FCN | 25.02.2016

Book Chapter or Article

Chapter 1, Part I, p. 1 11.

Chapter 2, Part I, p. 12 25.
Chapter 7, Part III, p. 95 105.
Chapter 3, Part 2, p. 29 54.
Chapter 8, Part III, p. 106 135.
Chapter 4, Part 2, p. 55 66.
Chapter 5, Part 2, p. 67 77.
Chapter 9, Part III, p. 136 147.
Chapter 6, Part 2, p. 78 92.
+ Varian (2006) to understand monopolies
Chapter 10, Part III, p. 148 172.
Griliches (1957)
Beise/Rennings (2005): Lead markets and
regulation (EU)
Chapter 11, Part IV, p. 173 189.

Exam Prep Session

Topics
Based on the questions you sent us, we will talk about the following
topics today
1. Mean Variance approach for technology portfolios
2. Arbitrage general definition and application for technology adoption
3. Why do we have to understand monopolies in a diffusion path?
4. Monopoly impacts and government
5. Double marginalization of monopoly pricing
6. Expectations and foresight in modelling
7. General things

Economics of technological Diffusion |

C.Oberst, J. Frieling| FCN | 25.02.2016

1. Mean Variance approach for technology portfolios

Question:
How are we supposed to understand the use of portfolio optimization and the

mean variance approach in the context of innovation adoption?

See slides 25-27 from L05 and Stoneman ch.4 for detailed information!
The expected mean return and the estimated variance of the return are
two measures that define the potential pay-off of an investment (=
mean) and the risk of the investment (=variance).
The firm employs a mix (=portfolio) of old and new technologies with
different means and variances.
A new technology is incorporated into the existing technology mix
depending on the estimated mean return and the variance

Economics of technological Diffusion |

C.Oberst, J. Frieling| FCN | 25.02.2016

1. Mean Variance approach for technology portfolios

Initially, the estimates for mean and variance are less accurate due to a
lack of information about the ultimate impact and performance of an
innovation.
Over time, mean and variance estimates approach the true value.
In the inter-firm model, this often leads to increased adoption
The risk aversion and profile of firms has a big influence on whether the
adoption is deemed profitable.

Economics of technological Diffusion |

C.Oberst, J. Frieling| FCN | 25.02.2016

2. Arbitrage general definition and application for technology adoption

Question:
How does arbitrage relate to the arbitrage condition?
See slides from L03, EU03 and Stoneman ch.3 for detailed information!
The definition of arbitrage in general is a risk free profit after transaction costs
Definition arbitrage condition: It must be not more profitable to postpone until a
date later than t
Arbitrage condition
NPV in time t of acquiring in time t + 1 is V(t, t + 1) where V(t, t + 1) will be
equal to V( t + 1, t + 1) discounted back to time t
This means that there is no positive value for waiting one more turn
The arbitrage condition makes sure that companies do not adopt too early just
because an investment is profitable, because they compare the profitable
investment with the potentially also profitable investment in t+1
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Economics of technological Diffusion |

C.Oberst, J. Frieling| FCN | 25.02.2016

3. Why do we have to understand monopolies in a diffusion path?

Question:
Why is it relevant to understand monopolistic market structures to analyze
technological diffusion paths?
Innovation spreads from a singular point, an original inventor or innovator.
Patents are a legal monopoly designed to incentivize investing in innovations
and spreading the knowledge of new technology
Due to potentially inelastic supply, the supply of new technologies often
happens in monopolistic or nearly monopolistic markets

Economics of technological Diffusion |

C.Oberst, J. Frieling| FCN | 25.02.2016

4. Monopoly impacts and government

Question:
The government guarantees a high price for a new technology through
exclusivity. But we know from microeconomics that in a monopoly there is a
deadweight loss reducing total surplus. So is it not "damaging" the market, to
manipulate the price?
Governments guarantee monopolies in the form of patents because they fear,
that without patents there will be too little innovation
The argument for patents is that the cost of patents in the form of increased
prices is smaller than the benefits.
One benefit is that technology increases faster because companies potentially
invest more into Research and development.
Another benefit is the spreading of knowledge, because patents are publicly
available and therefore everybody can read them.
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Economics of technological Diffusion |

C.Oberst, J. Frieling| FCN | 25.02.2016

5. Double marginalization of monopoly pricing

Question:
How does the concept of the double marginalization of monopoly pricing apply
to technological diffusion?
Monopoly prices are higher than in a competitive market, which causes welfare
losses.
However, especially in new technologies with few competitors, we see more
than one monopoly in the value chain:
One company is a monopolistic supplier for a new technology.
However this company relies on very specialized inputs which are also only supplied
by one supplier. This company therefore pays monopoly prices for its inputs.

The ultimate consumers can therefore pay the embedded monopoly price for
more than one step in the value chain.

Economics of technological Diffusion |

C.Oberst, J. Frieling| FCN | 25.02.2016

6. Expectations and foresight in modelling

Question:
Is an adoption/investment decision based modeling a perfect foresight
superior than with myopic perspective?
The two perspectives are models for understanding decision making
processes.
They are assumptions about market actors: Is everybody able to predict the
future development of prices for a technology?
In that case, we have perfect foresight and maybe diffusion is too slow from a welfare
perspective.

Or maybe we imagine a model where agents do not look into the future and
only consider data available in the present period, in this case we have myopia.
The truth obviously lies somewhere in the middle, but many economic models
concern themselves with how and why expectations are formed.
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Economics of technological Diffusion |

C.Oberst, J. Frieling| FCN | 25.02.2016

7. General Questions
I do not understand the part of Mahajan and Peterson diffusion model
related to the " specification of the upper limit" and some sentences
like: "Distance merely represents a surrogate measure...

The upper limit of diffusion is dependent on spatial features (see also Grilliches and the
factor of cornbeltiness)
Distance as a measure does not have to have an immediate economic impact or an
impact on diffusion. However it can be a crude measure to identify other factors, such
as geographic and demographic similarity, connectedness, etc.

I have trouble understanding the endogenous and exogenous characteristics of

the diffusion path.
Endogenous and exogenous variables are ways to describe how a model sees a
certain influence factor:
In the epidemic model the spread of information and therefore the rate of adoption is
endogenous, it is explained from within the model.
The diffusion in the SOR models depends on changes in exogenous factors, like a
reduction in costs. When the costs for a technology stay the same adoption stalls.

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Economics of technological Diffusion |

C.Oberst, J. Frieling| FCN | 25.02.2016