Abstract

Technology develops so rapidly, even faster than our ability to adapt sometimes. Thus, when a new technology appears, innovative firms face a problem of choice: how to deal with the old technology, i.e., whether to stop it, or merely maintain it, or even improve it. In reality, many industries show the co-existence of old and new technologies despite the cost of maintaining two products lines, even improve the old technology while incurring the improvement cost. This paper introduces a two-period model that examines a firm’s appropriate response strategy for old technology to the emergence of new technology, in which the firm has three alternatives: stop, “wait and see”, or improve. In our paper, we find the equilibrium price and quality level, and examine the impact of new technology’s network externality and marginal cost on the equilibrium.

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