Kicking an Old Habit: Conditions for the Succession of a Network Good
http://www.springerlink.com/content/ukk53230107lg783/
We have discussed the establishment of network goods by surpassing a certain unstable equilibria in order to reach a stable equilibrium fraction of the population consuming the good. Once this equilibrium has been established, however, it is unclear how another network good that serves nearly the same purpose could usurp and succeed an existing good. The network effects of the old product would outweigh the nonexistent network effect of the new product and so it would be very difficult for the new product to establish itself. Despite this, the succession of telegraphs to telephones and vinyl records to compact discs demonstrate that it is in fact possible to overcome the network effects of a good and thus replace it. The linked article was written by Paul Windrum and Chris Birchenhall and published in the Journal of Evolutionary Economics. They synthesize theories and information from previous publications on technological succession in order to deal with the various factors that affect the likelihood that a new technology will replace and succeed an established one.
A main argument in their article is that in order for a technological succession to occur, three necessary (but not sufficient) conditions must be met. First, there must be a new class of consumers that have different preferences from the old class that adopted the preexisting technology. There must also be one or more firms that are willing to produce the new technology. Second, the new technology must have, in addition to the features of the preexisting technology, novel uses or characteristics that are valued by the new consumer class. Third the technology must have a competitive price and quality with the existing technology.
While these conditions being met may lead to a technological succession, the article also discusses hindrances that may stop succession. What is known as the “Sail-boat effect”, or a burst of innovation in an existing technology in response to the threat of a newer technology can suppress succession. Also, relatively high fixed startup costs can prevent an otherwise viable technology from being adopted, as it proves too costly to produce using the current methods and technology available.
In conclusion, the existing technology has an advantage of being established and having its own positive network externalities, but given a set of conditions it can be replaced by a newer technology that has a novel appeal to a new group of consumers.