Strategic intrafirm innovation adoption and diffusion

A theory of oligopolistic innovation adoption is developed in which intrafi rm diffusions occur because the marginal cost of adoption is increasing in the rate of adoption. The equilibrium intrafirm diffusion curve is S-shaped or concave, as are empirically observed ones. This diffusion curve is more likely to be S-shaped the more competitive the industry, the larger the ma rginal cost of adoption or the pre-innovation unit cost of production, or t he smaller the demand. The diffusion is longer, and so the extent of adopti on at any date is lower the more competitive the industry, the larger the m arginal cost of adoption or the pre-innovation unit cost of production, or the smaller the demand. A surprising result is that an increase in the unit cost reduction from the innovation has an ambiguous effect on diffusion. O bviously, a larger cost reduction allows each firm to earn a larger flow pr ofit at every date from the same rate of adoption. However a more subtle ef fect is that it also allows the firm to earn the same flow of profit with a slower rate of adoption, and so lower adoption costs. That is, the firms a lso have an incentive to spread out the diffusion over a longer period of t ime to save on adoption costs.