- The technology system requires simultaneous or serial use of both hardware (HW) and software/content (SW) components to provide users with the full consumption experience offered by the technology system
- Users purchase HW once, but they may buy SW each period
- HW and SW components are supplied by independent entities
- The technology system exhibits direct and/or indirect network effects
- There are other existing (established) technology systems that do what the new system proposes to do, though perhaps less effectively or less efficiently
- Description: Hardware Manufactures (HW) are systems innovators, who introduce new technology systems into the market.
- Action: HW must choose the portion of users who will adopt their new system each period (via setting the appropriate price), so as to maximize profits across periods.
- Incentives: When network effects are stronger HW will want to establish a larger base of new users earlier to increase value to later adopters; that is, HW want a faster pace of adoption of the new system.
- Description: Software Providers (SW) supply software and content that enhance the consumption experience provided by technology systems.
- Action: SW must choose the portion of resources to allocate to the production of new v. old systems content each period, so as to maximize profits during that period.
- Incentives: When network effects are stronger, SW will want to serve the installed base of old system users until a larger number of users have adopted the new system, that is, there will be longer delays in supplying content for the new system.
- Description: Users are users of old and new technology systems.
- Action: Users must decide if and when to adopt the new technology system.
- Incentives: When network effects are stronger, users will delay adoption of the new system until a larger base of users has adopted the new system, that is, there will be longer delays in adoption of the new system.
The mutual incentives of the three sets of players often lead to delays in adoption of new technology systems, where
- SW will not provide new systems software until a sufficiently large number of users adopt the new system, and
- Users will not adopt new systems until SW provides a sufficient amount of content to make adoption worthwhile
In Winning the Hardware-Software Game: Using Game Theory to Optimize the Pace of New Technology Adoption, I use a simulation model to analyze the dynamics of the Hardware-Software Game, which provides insights suggesting methods systems innovators can use to speed the pace of adoption of their new technology systems. I can also use the simulation model to help hardware and software providers optimize the pace of adoption by quantifying optimal prices and/or supply amounts under specific market conditions.