The Role of Demand on the Generation of Technological Niche Markets

We study the assimilation of innovations and product improvements by rational decision makers (DMs) and illustrateits effect on the incentives of firms to innovate and introduce technologically superior products(TSPs). The paper presents anequilibrium model where the optimal behavior of firms regarding the introduction of TSPsand the dynamic behavior of the market structure are both determined by the demand side of the market. At the same time, the optimal and rational choices made by a DMwill be determined byhis degree of risk aversion, hisreceptiveness and assimilation of signals indicating the existence of TSPs, hisability to shift choices between markets of products and the signaling decisions made by firms. The necessary requirements for the generationof technological niche markets where firms signaling the existence of TSPsmay survive will be identified.