Are markets efficient in technology provision?

Over the last two decades, economic theory is beginning to question the hypothesis that markets choose technology in an efficient manner. The ‘path dependence school’ cites the example of the adoption of VHS over Beta in the 1980s as the videotaping standard as a case study in the possibility of an inferior technology winning out over a superior one based on network effects or historical factors.

Further even supporters of the power of markets cannot ascertain the time taken for markets to arrive at the efficient solution (or ‘equilibrium’ in economics parlance).

There is another argument for intervention which is that even if the market were to choose the appropriate technology and do so soon enough, it may not choose the technology developed by the smaller, less well off entrepreneur. All things being equal, an incumbent has greater access to resources that enable entry into a new market. And if they are handicapped in their ability to innovate due to size or unwilling to innovate due to sunk costs[1], they can lock in their customers with sweet deals in order to stall the market till they come up with the new technology.

Given the tremendous spillover effects of the rise of national equipment manufacturers, a government  should care for the country of origin of the label on the new architecture, not just about the fact that it gets introduced after all. The market would pay no heed to this consideration.

Governments all over the world including the USA have played an important role in the development of technology.  The Chinese government has introduced a rule which requires sellers of high-tech products to acquire accreditation based on “indigenous innovation” — local intellectual property — before they can be listed in a government procurement catalog. Approved products will get preference over those without accreditation. Local companies will get an advantage in the multibillion dollar business of selling high-tech products to government departments.

Those of you who are working on technology startups need to understand the complex dynamics that will determine your success beyond the need addressed by you and the completeness of your solution.

[1] Incumbents locked in to a certain technology would have a preferred time window for migrating to newer technologies and an innovation cycle for developing new technologies. This represents a competitive disadvantage vis-à-vis new firms.

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