The Dynamics of Technological Adoption in Hardware/Software Systems

In this paper we examine the dyamic 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 license 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 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.