Climbing quality ladders and the evolution of technology dynamics: rethinking the role of demand in technological change

The current paper analyses how the information gathering capabilities of consumers affect the patterns of technological innovation, establishing an explicit link among market demand, firms and the evolution of technology dynamics. We examine the effects that different decision theoretical driven demand structures may have on the incentives of firms to signal the existence of and introduce technologically superior products. We illustrate how the generation of technological niche markets depends on the ability of decision makers to reverse their information gathering processes and compare the goods observed in different markets before making a choice. In addition, we obtain equilibrium situations where the introduction of technologically superior products and subsequent generation of niche markets, i.e., climbing the technological quality ladder, is suboptimal for the signalling firm. Further, numerical simulations are introduced to illustrate the theoretical results obtained.