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The Impact of Competition on Technology Adoption: An Apples-to-PCs Analysis

The Impact of Competition on Technology Adoption: An Apples-to-PCs Analysis

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Published by Luis
by Copeland & Shapiro. We study the effect of market structure on a personal computer manufacturer’s decision to
adopt new technology. This industry is unusual because there exist two horizontally segmented retail markets with different degrees of competition: the IBM-compatible (or PC) platform and the Apple platform. We first document that, relative to Apple, producers of PCs typically have more frequent technology adoption, shorter product cycles, and
steeper price declines over the product cycle. We then develop a parsimonious vintage-capital model that matches the prices and sales of PC and Apple products. The model predicts that competition is the key driver of the rate at which technology is adopted.
by Copeland & Shapiro. We study the effect of market structure on a personal computer manufacturer’s decision to
adopt new technology. This industry is unusual because there exist two horizontally segmented retail markets with different degrees of competition: the IBM-compatible (or PC) platform and the Apple platform. We first document that, relative to Apple, producers of PCs typically have more frequent technology adoption, shorter product cycles, and
steeper price declines over the product cycle. We then develop a parsimonious vintage-capital model that matches the prices and sales of PC and Apple products. The model predicts that competition is the key driver of the rate at which technology is adopted.

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Published by: Luis on Jul 23, 2010
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10/25/2012

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Federal Reserve Bank of New York Staff Reports
The Impact of Competition on Technology Adoption:An Apples-to-PCs AnalysisAdam CopelandAdam Hale ShapiroStaff Report no. 462July 2010
This paper presents preliminary findings and is being distributed to economistsand other interested readers solely to stimulate discussion and elicit comments.The views expressed in this paper are those of the authors and are not necessarilyreflective of views at the Federal Reserve Bank of New York or the FederalReserve System.Any errors or omissions are the responsibility of the authors.
 
The Impact of Competition on Technology Adoption: An Apples-to-PCs Analysis
Adam Copeland and Adam Hale Shapiro
 Federal Reserve Bank of New York Staff Reports
, no. 462July 2010JEL classification: D40, L10, L63, O30
Abstract
We study the effect of market structure on a personal computer manufacturer’s decision toadopt new technology. This industry is unusual because there exist two horizontallysegmented retail markets with different degrees of competition: the IBM-compatible (or PC) platform and the Apple platform. We first document that, relative to Apple, producersof PCs typically have more frequent technology adoption, shorter product cycles, andsteeper price declines over the product cycle. We then develop a parsimonious vintage-capital model that matches the prices and sales of PC and Apple products. The model predicts that competition is the key driver of the rate at which technology is adopted.Key words: innovation, market structure, computers
Copeland: Federal Reserve Bank of New York (e-mail: adam.copeland@ny.frb.org). Shapiro:Bureau of Economic Analysis (e-mail: adam.shapiro@bea.gov). The authors thank Ana Aizcorbe,Olivier Armantier, Steve Berry, Ben Bridgman, Phil Haile, Bronwyn Hall, Kyle Hood, DavidMowery, Matt Osborne, Ariel Pakes, Jeff Prince, and Dave Rapson for comments andsuggestions. The views expressed in this paper are those of the authors and do not necessarilyreflect the position of the Bureau of Economic Analysis, the U.S. Department of Commerce, theFederal Reserve Bank of New York, or the Federal Reserve System.
 
1 Introduction
A multitude of industries consist of downstream firms which adopt technologicalinnovations developed by upstream manufacturers. Cameras, cell phones, stereos, andpersonal computers (PCs) are examples of such goods which can be thought of as anassembly of individual innovative components.
1
Firms producing these types of consumergoods are “technology adopters” in the sense that they choose whether or not to adopta new technology, but the technological limit, or frontier technology, is dictated byupstream firms.In this paper, we analyze the relationship between market structure and technologicaladoption in the personal computer industry. Our work makes two contributions. First,we provide a descriptive analysis of the industry, measuring rates of technology adoptionunder different market structures as well as documenting prices and sales over a typicalcomputer’s life cycle. Second, we use a vintage-capital model to quantify the importanceof market structure on the rate of technology adoption.Similar to many other technological industries, the personal computer market is onein which adoptions are extraordinarily frequent and new products almost always incor-porate new technology advances. Unlike most industries, however, an important featureof the personal computer industry is the existence of two segmented retail markets. Theindustry is divided between two platforms: the IBM compatible platform (or simplythe “PC”) and the Apple platform.
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While there are many differences between theseplatforms, the largest difference is arguably their operating systems; PCs run on Mi-crosoft Windows while Apples run on Mac OS.
3
The horizontal differentiation betweenPCs and Apple therefore segments the retail market in the sense that consumers of PCs
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The central processing unit (CPU), for instance, which is a key component of many of these products,is in many cases produced by chip manufacturers.
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For a general overview of the history of competing platforms see Bresnahan and Greenstein (1999).Given the evolution of this industry, the IBM compatible platform is also referred to as the Wintelplatform, a label that alludes to the Windows operating system and Intel processor combination usedby the vast majority of these computers.
3
Stavins (1995) refers to this type of platform differentiation as horizontal differences in the order of quality. This is in contrast to to vertical differences (e.g. speed and memory) along a certain platformline.
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