Adoption of innovations

Preview

• Today: Adoption of innovations
• Oct 12: Automation
• Oct 19: Geography

Outline

• Individual adoption
• Network effects
• Platforms
• Organizational adoption

Economic factors

• Participation: Benefit / cost
• Electric vehicle: High purchase price vis-à-vis low operating cost -- people who drive more would benefit more [next slide]
• Extent: Marginal benefit / marginal cost
• How much to drive?
• Climate change policy
• Ideal: Carbon tax
• Second-best: Mandate fuel efficient petrol and diesel vehicles: Perverse effect -- low marginal cost of driving => encourages usage (more emissions)

Economic factors

• Complements
• Education and training -- Newspapers / literacy
• Hardware/software/telecom service [later slide]
• Physical infrastructure -- Electric cars / charging stations [next slide]

Other factors

• Psychology [later slide]
• Principal-agent [later slide]
• Network effects [later slide]

Hardware/software/telecom service

• Demand for hardware -- iPhones, Microsoft Surface, Nintendo consoles
• Usual factors -- price, income, ..
• Expected variety and price of software
• Price and quality of telecom service
• Demand for software
• Usual factors -- price, income, ..
• Installed base of hardware
• Price and quality of telecom service
• Example: Indian demand for mobile gaming apps took off in 2016 when telecos engaged in price war

Electric motorcycle [Rwanda]

• Ampersand, Rwanda https://www.youtube.com/watch?v=9g0kprlqrQ8
• Rwanda Electric Mobility: Founded by Singaporeans Chia Lee Wee, Timothy Liew, Kelvin Tan and Paul Ho, 2018
• Sells new electric bike for USD1700, retrofits ICE bike for USD600
• August 2022: Sold 170 new, retrofitted 86
• Hurdles -- charging points, charging time: Solution – swap batteries (NIO; Taiwan e-bikes)
• Designed batteries exclusively for own chargers -- protecting intellectual property and deterring theft

Psychology: Openness to innovation

• Skinner and Staiger (2007) cross-section study of United States
• Farmers’ adoption of hybrid corn in 1930s-40s correlated with physicians’ adoption of beta blockers to treat heart attacks in early 2000s.
• Test Big 5 across U.S.?

Source: Anna Tunikova

Pharmaceuticals

• Who is the buyer?
• Recommender / prescriber -- physician, hospital
• Formulary
• Regulation
• Prescription
• Approved use, eg, Dabrafenib for skin cancer
• “Off-label” for brain cancer
• Over-the-counter
• Third-party payer
• Insurer
• Reimburser, eg, Medisave
• Group buyer, eg, business

�Mitral valve repair: Bolling et al. (2010)

Treating mitral valve disease

• Replace with artificial or animal valve
• Repair
• Better for patient – longer lasting, do not need immuno-suppressant drugs
• More complex procedure than replacement

Mitral valve repair: Bolling et al. (2010)

• Adoption of innovation depends on service provider: Asymmetric information between patient/surgeon
• Repair correlated with surgeon volume
• Fixed cost of learning: Only high volume surgeons would invest
• Differences between hospitals: Surgeons must learn from others proficient in method (tacit knowledge) – low volume facilities would not provide such training
• Reverse causation: Surgeons who perform mitral valve repair attract more patients
• Gains from learning expressed through new technique, not just getting better in existing method

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Outline

• Individual adoption
• Network effects
• Platforms
• Organizational adoption

Network effects

• Expectations
• Coordination
• Compatibility (inter-operability)

• Communications
• WhatsApp
• WeChat
• Apple Facetime
• Productivity
• Microsoft Office
• Google documents
• Adobe Creative

Demand

• Demand
• Usual factors -- price, income, ..
• Additional factor: Expected number of other users
• Social/private optimum
• Marginal user balances marginal private benefit = marginal private cost
• But ignores additional benefit to other users -- externality
• Socially-optimal size of network > market equilibrium size
• Examples: Mobile telephony, Internet access

Static market equilibrium

• Adoptions are strategic complements
• If other people adopt, marginal benefit is higher => each person more likely to adopt
• Situations of strategic complements -- multiple rational expectations equilibria
• Good: All people adopt
• If expect everyone else to adopt, then I will adopt
• Bad: None adopt
• If expect no one to adopt, then I will not adopt
• Example: Social media – TikTok vis-à-vis Instagram Reels

Market structure

• Monopoly
• Captures more of externality => incentive to “sponsor” larger network
• Market power => prices above marginal cost => smaller network

• Facebook provides Internet to developing countries
• Google provides high-speed Internet to U.S. cities

Hardware/software

• Demand for hardware -- iPhones, Microsoft Surface, Nintendo consoles
• Usual factors -- price, income, ..
• Expected variety and price of software
• Supply of software
• Usual factors -- cost, ..
• Number of end-users (installed base of hardware)
• Example: Huawei
• U.S. prohibited from Android
• Developed own operating system
• Sales of mobile phones [graph]

Adoption of technology: Public policy

• Network effects: choices of technology are strategic complements
• Excess inertia (Farrell and Saloner)
• Current users bear costs of changing technology
• Benefits accrue to future users

Low-emissions cars:

• Electric: Charging points
• Hydrogen: Refueling points

Adoption of technology: Public policy

• Insufficient friction (Katz and Shapiro)
• New adopters choose incompatible technology, stranding existing users (negative externality)
• Particularly if supplier of new technology has market power (can sponsor) while old technology is competitive

Discussion questions

1. Commuters can choose among hailing a taxi on the street, booking a taxi or ride hair car through an app. Explain how the choices of consumers between street hail and booking affect the availability of taxis on the street, and so, produce a network effect.
2. With network effects, current adoption depends on past adoptions by others. Discuss the challenges in estimating network effects.

Outline

• Individual adoption
• Network effects
• Platforms
• Organizational adoption

Platforms

• “Two-sided” markets (Any market without two sides?)
• Consumers
• Suppliers
• Network effect across sides
• Example: Social media, newspapers
• Consumers ~ advertisers

Platforms

• Conventional business: Set price to customers
• Platform business: Set prices to both sets of customers
• Additional degree of freedom: cross-subsidy
• How can Google and Baidu provide free service?
• How can newspapers be free?
• Curation: Advertising that you want to see

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Adobe: Platform business?

Platforms

• Grab – provides bookings for taxi and hire-car
• How is Grab a platform business?
• How does scale increase productivity?
• Government regulation: Ride-hailing service not allowed to impose exclusivity on drivers

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25

In what way is payments a platform business?

Credit and debit cards

• Platform market

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• Bank market power => high interchange and processing fees => retailer prefer cash (e.g., Comfort Taxi) => consumer do not subscribe to credit cards

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Interchange fee

Processing fee

Member fee;

Rebate

Credit and debit cards

• Acquiring bank
• On-network: bank avoids interchange fee
• Off-network fee > on-network fee
• Result: Proliferation of card terminals
• Inefficiency – duplication of equipment, counter space
• Compare
• NTUC Fairprice
• Challenger

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27

YouTube, Tiktok: Platform + Peer sourcing

• Platform: Three sides
• Content creators
• Advertisers
• Consumers
• Peer sourcing - Legal, ethical?
• Copyright
• Obscenity
• Incitement
• Defamation

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Electronic platforms: Law

• Communications Decency Act, 1996, Section 230: “No provider or user of an interactive computer service shall be treated as the publisher or speaker of any information provided by another information content provider.”

Outline

• Individual adoption
• Network effects
• Platforms
• Organizational adoption [student presentation]

Adoption: Organization

• Participation: Benefit / cost
• Extent: Marginal benefit / marginal cost
• Agency -- conflict between principal and decision-maker

Soccer balls

China out-competing Pakistan by machine-stitching

• Why don’t Sialkot producers mechanize?

Moral hazard

• NUS Lecture Theatres – why so cold?
• Atkin et al. (2017): Sialkot manufacturers of soccer balls https://www.youtube.com/watch?v=ybobE0ijbeY [student presentation]

Adoption: Organized sports

• Instant replay
• Technology available for a long time
• Various sports adopted at different times
• Inertia: Established teams and players opposed in belief that it disadvantaged them
• Soccer
• FIFA 2010 adopted Jabulani ball: Teams took time to adjust, play improved but only top teams benefited, early eliminated teams complained
• FIFA 2014 reverted to Brazura ball

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Adoption: Organization

• Complements
• Education and training
• Additive manufacturing (3D printing)
• Prefabricated construction
• Physical infrastructure
• Household power generation / supply network
• Regulation
• Renewable power generation -- Legal framework to sell excess supply to grid

Behavioural challenges: Cui bono?

• Government as regulator: Learner driver triangle
• “The figures given are general statistics … we cannot conclude therefore that it is the scheme that has made it such.” Ho Peng Kee, Senior Minister of State.
• Collective action problem: Inertia favours the rent-seeker
• “Benefit” is concentrated
• Cost is dispersed

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Behavioural challenges: Cui bono?

• Challenges even in for-profit sector
• Singapore retailers:
• Why multiple credit/debit card machines?
• Why print separate receipts for item and payment method?
• Marina Bay Sands: Every room is different
• Landscaping: Manicured look

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Behavioural challenges

• Status quo bias
• Reinforced by
• Perverse incentives
• Agency problem
• Collection action problem
• No champion for higher productivity -- especially
• Businesses willing to earn less than cost of capital
• Businesses not subject to competition
• Non-profit organizations
• Government as regulator or consumer – captured by vested interest