tween firms and uncertainty about revenues and investment costs. For simplicity we neglect adjustment costs.
Our initial intuition is that when uncertainty is added to the investment problem, for instance uncertainty about the cost of the technologies, the conventional wisdom stated above may not hold, since due to technological progress the cost of a technology can decline rapidly and, therefore, when firms anticipate that the cost of technologies may not fall at the same rate, it may pay to adopt first the technology whose price is falling more slowly and wait to adopt the technologies whose price is falling more rapidly.
The concept of the complementarity between the elements of a (technological) “system” is studied here from the adopter’s point of view. Our aim is to investigate to what extent the degree of complementarity between two technologies affects the adopter’s investment behavior, in economic contexts where uncertainty and competition hold as well. However, the phenomenon of complementarity between the inputs of a “system” affects many other areas of the economy and, therefore, can be studied from other perspectives. For instance, it has been argued that the pace of modernization of an industry is quite often influenced by the degree of technological
3 Dixit and Pindyck (1994), chapter 9, Grenadier (1996), Lambrecht and Perraudin (1997), Huisman (2001), Weeds (2002) and Paxson and Pinto (2005) address such problems.
4 See Milgrom and Roberts (1990, 1995) and Javanovic and Stolyarov (2000).
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complementarity between it and those whose activities are complements. This phenomenon was studied by Smith and Weil (2005) who investigated how changes in retailing and manufacturing industries, together, affected the diffusion of new information technologies in the U.S. apparel industry between 1988 and 1992. They show that the process occurs in a stepwise fashion5, i.e., retailers typically adopted the new information technology systems first and the increased demand for rapid replenishment by retailers then stimulated suppliers to adopt new manufacturing practices and make greater investments in complementary information technologies, causing a “ratchet-up” process as the payoffs to adopting increased when more customers and suppliers, respectively, adopted. This case constitutes, according to the authors, an extraordinary example of the effect of the complementarity between new technologies on the pace of modernization of interlinked industries.
Other area where the concept of “complementarity” plays also an important role is the area of research and development (R&D), in the sense that firms, when planning their R&D activities, do make strategic decisions regarding the degree of complementarity (sometimes called compatibility) between the new products they aim to launch in the future and the complement products that are already available in the market and those they conjecture will be launched by their opponents in the future6. We find in the market two distinct types of behaviour (strategies) on this regard: firms who do not have a dominant market position and want to growth tend to guide their R&D efforts in order to launch new products that are, as much as possible, complement (compatible) of those from their opponents who have a dominant market positions; firms who have a dominant market position tend to guide their R&D efforts in order to launch new products that are, as much as possible,
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