4 What is meant by technological advance, as broadly defined? How does technolog

Question

4 What is meant by technological advance, as broadly defined? How does technological advance enter into the definition of the very long run? Which of the following are examples of technological advance, and which are not: an improved production process; entry of a firm into a profitable purely competitive industry; the imitation of a new production process by another firm; an increase in a firm's advertising expenditures?

5 Learning how to use software takes time. So once customers have learned to use a particular software package, it is easier to sell them software upgrades than to convince them to switch to new software. What implications does this have for expected rates of return on R&D spending for software firms developing upgrades versus those developing imitative products?

6 Why might a firm making a large economic profit from its existing product employ a fast-second strategy in relationship to new or improved products? What risks does it run in pursuing this strategy? What incentive does a firm have to engage in R&D when rivals can imitate its new products?

Explanation / Answer

4. Technological advance makes products either more useful, less costly to produce, or possibly both. Cases in point: the plow made food less costly to produce. Railroads made transportation less costly and more useful. The Bessemer Process made steel stronger and therefore more useful. Microtechnology advances continue to make computers more useful and less costly. Technological advance is broadly defined as new and better goods and services and new and better ways of producing or distributing them. There is a distinction between the “long run” and the “very long run.” In the long run, technology is constant but firms can change their plant sizes and are free to enter or exit industries. In contrast, the very long run is a period in which technology can change and in which firms can introduce entirely new products. (a) An improved production process; Yes (innovation) (b) Entry of a firm into a profitable purely competitive industry; No (c) The imitation of a new production process by another firm; Yes (Diffusion) (d) An increase in a firm’s advertising expenditures; No 5. Expenditures on R&D carry a great deal of risk. Upgrading an existing product is likely to be less risky than developing an imitated product. Consumers value their time as well as money and are likely to prefer products that are familiar. Imitating a successful product may save the cost of R&D for development, but there are significant protections that may end up costing the “copy cat” firm dearly. Patents, copyrights, and brand name recognition all contribute to give the original innovator a major marketing advantage. 6. A dominant firm that is making large profits from its existing products may let smaller firms in the industry incur the high costs of product innovation while it closely monitors their successes and failures. In using this “fast, second strategy,” the dominant firm counts on its own product improvement abilities, marketing prowess, or economies of scale to prevail. A firm that attempts to imitate the new products of rival firms may encounter a variety of roadblocks. Patent rights for a secret process may stop the effort cold or lead to costly lawsuits. Developing new products can be very profitable and there are several protections and advantages to taking the lead, including patent protection, copyrights and trademarks, lasting brand name recognition, benefits from trade secrets and learning by doing, high economic profits during the lag time between a products introduction and its imitation, and the possibility of lucrative buyout offers from larger firms.

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