Market integration and technological change

This paper studies the incentives of firms to introduce new technologies in markets where network effects are sensitive to the identity of the adopter. We model this sensitivity by considering a market in which consumers are located in two economies and network effects across economies are weaker than intra-economy network effects. The strength of cross economy network effects is measured by the degree of market integration. We show that the incentives for technological change are decreasing with respect to the degree of integration and that they are in excess of what is socially desirable. We also show that different generation technologies can coexist only if the market is poorly integrated and that this coexistence is characterized by a form of technological leap-frogging across economies.