Strategic innovation and technology adoption under technological uncertainty

Abstract

This article analyzes the effect of technological uncertainty in an innovation market where upstream innovators develop innovations and downstream technology adopters use them. Technological uncertainty takes the form that it is unclear when future innovations will arrive and how they will perform. We show that technological uncertainty not only reduces adopters’ incentives to use new innovations, but also decreases innovators’ incentives to develop them. This uncertainty effect leads to lower innovation and adoption rates at the market equilibrium, resulting in inefficiently slow innovation and diffusion processes compared to the social optimum. To solve this uncertainty problem, we show that a quantity-based regulation is more recommended than a market-based R&D or price subsidy.