The Dynamics of Technological Adoption in Hardware/software Systems: the Case of Compact Disc Players

In this paper we examine the dynamic resolution of technological adoption in "hardware/software" systems. We are interested in determining to what extent software availability affects hardware sales and/or vice-versa. We first develop a dynamic model for estimating demand when costs (and hence prices) are declining over time. We then estimate it empirically for the case of compact disc players. We find that there is "two-way" feedback between hardware and software for compact disc players. The result that the availability of compatible software (the CDs) plays a significant role in determining the adoption of compact disc players is likely due in part to the fact that compact disc players were not compatible with any existing audio standard. We thank Gordon Hanson, Ariel Pakes, John Rush and seminar participants at Georgetown University, the Helsinki School of Economics, the University of Maryland, the University of Pennsylvania, the University of Texas, and Yale University for helpful comments. We are grateful to INSEAD for a research grant and to Julia Stephan for expert research assistance.