On the Competitive Pressure Created by the Diffusion of Innovations

We consider the decision of a dominant firm to adopt (part or all of) a sequence of potential cost-reducing innovations, as well as the precise time sequence of adoption, when a fixed cost must be incurred at the date of adoption, and the latest technology diffuses to a competitive fringe at an exogenous rate. With Bertrand competition on the product market, it is optimal for the leader to space apart the adoption dates of successive innovations, so that the industry is characterized by Schumpetarian cycles of alternating innovation and diffusion. Further, an increase in the diffusion rate may hasten the pace of innovation. These results do not extend to the case of Cournot competition.