Quantifying the Lock-in Effect in a Dynamic Industry

University Of Iowa, Iowa City IA

Investigators

Abstract

The goal of this research is to understand why incumbent firms sometimes are followers in using new technology, even when they were instrumental in developing it. The evidence suggests that they face a larger opportunity cost than entering firms. Incumbents are locked in to older technologies because of their higher productivity in using older technologies, while entering firms can only use the new technology. The primary goal is to determine how large this lock-in effect is. The data used is from the rigid drive industry. This industry is well-suited for this exercise, since technology advances are rapid and there has been evidence of both situations where incumbents have lagged behind in the use of new technology and where they have been the first to use new technology. Simulating the model to approximate the data will provide information on what changes in the environment lead to the lock-in effect. In the model, as the relative value of the product produced using the new technology increases, the lock-in effect tends to decrease. However, the simulation of the model can provide us with direct evidence of how much the relative value must increase, given the other parameters, in order to eliminate the lock-in effect. A similar experiment can be run with changes in productivity. Computationally, this means solving the equilibrium model with many agents and calculating the difference in the value of an incumbent firm from switching to the newest technology. This is a formidable task as the agent's productivity using a given technology and the distribution of the agents' productivity using a given technology are state variables. Because the output from the computed model must approximate the data, this means repeating this task as the program searches for the appropriate values of the state variables, as well as the other parameters for the model.