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

In this paper we examine the diffusion of a hardware/software system. For such systems there is interdependence between the hardware-adoption decisions of consumers and the supply decisions of software manufacturers. Hence there can be bottlenecks to the diffusion of the system. We consider the CD-industry and estimate the (direct) elasticity of adoption with respect to CD-player prices and the (cross) elasticity with respect to the variety of CD-titles. Our results show that the cross elasticity is significant. Our model can be used to quantify the effect of various policies aimed at speeding up the diffusion of a system