A Model of Diffusion in the Production of an Innovation

Abstract

This paper is an attempt to explain diffusion in the production of an innovation. Diffusion in production is defined as the increase in number of producers, or net entry, in the market for a new product. It is to be distinguished from the more familiar problem in the literature on technical change, namely, the diffusion among producers in the use of new products and, hence, of changes in production processes for "old" products (or services). The empirical results confirm that a simple model -- simple in terms of number of variables -- is sufficient to explain most of diffusion in the production of an innovation. The principal variable that explains diffusion of entry is the demonstration effect. The principal variable that retards entry is the accumulated experience and goodwill of existing firms. A limiting force is the population of potential entrants. None of these variables appears to lend itself readily to influence by public policy. The first stage in diffusion -- the interval from first commercial introduction of the product to entry by competitors -- varies greatly in duration. Institutional variables, including public policy, may have a greater impact on the length of this first stage, which is not covered by this study, than on the diffusion process in the periods examined in this paper.