Lecture 3- SORE model

Question 1

Explain the Epidemic model equation

Answer 1

N- number of potential adopters
S(t)- Adopters at time , t
ψ- Rate of diffusion

Question 2

Define the epidemic model

Answer 2

Diffusion is a process that spreads like an infection. It’s assumed the exchange of information is made just by contact. Therefore users and non-users are homogenously mixed in the social environment, Because of a constant rate of diffusion, non-users will have more chances over time to meet users.

Question 3

What are the assumptions of the epidemic model?

Answer 3

• The considered technology has a constant population of potential adopters.
• From the social point of view we have users and non-users. They mix homogeneously and make contact over time.
• We simplify the contact form saying that non-users will become users simply by contacting users of the technology.
• The number of users increase over time, thus the chances of non-users to meet users increases, given a constant mixing of the population.
• Growth will be displayed in an S-shaped curve.
• The adoption process can be considered as a transfer of information, meaning non-users learn about the technology. In real conditions, the diffusion process can take years, which is why the epidemic model gives a weak explanation about the involvement of knowledge in information transfer.

Question 4

What are the criticisms of the epidemic model?

Answer 4

• Interpersonal contact is the only source of information.
• There’s no clear picture to what the information refers.
• There’s no behavioural content and no explicit consideration of economic behaviour.
• Often assumed that technology doesn’t change over time, so the price and performance is unrealistic.
• Assumes that users live forever, and that population is homogenous and unitary, so no non-mixing subgroups that may stop the process.

Question 5

What are the main characteristics of the equilibrium model?

Answer 5

The equilibrium model- It requires stimuli from outside and includes Rank, Stock and Order models.

Question 6

What are the main characteristics of the disequilibrium model?

Answer 6

• The disequilibrium model- the speed of adjustment is determined by the frequency of personal contact and the amount of required contact for adoption. It emphasizes how information spreading generates diffusion path.

Question 7

Define gross profit gain.

Answer 7

Assuming a new technology is acquired by a firm I in the industry J by the purchase of a new capital good which is priced P (t) at time t.

so gij(T) = g(Ci, Sj (t), Kj(T))
Where:
•	C: Vector of firm characteristics (Rank).
•	S: number of previous adopters (Order).
•	K: number of firms that have already adopted the new technology, AKA users at time t (stock).

Question 8

Explain main points of Rank

Answer 8

Equilibrium model, where firms are considered different between each other. This results in different optimal adoption dates.

• Adopters have different characteristics and we assume that all firms know about the existence of some technology.
• Population is mixed heterogeneously, and these differences can result in different benefits from the adoption and the use of a new technology.
• New technology is adopted when the cost falls or when the benefit from adoption increases.

Question 9

Explain main points of Stock

Answer 9

Equilibrium model, where the probability of adoption changes with the number of users. This is because for a given adoption cost, only some firms will find this adoption profitable.

• Considers the benefits of technology related to the output levels (stocks).
• Considers firms as heterogenous entities, thus the firms output level depends on other firm’s adoption behaviour.
• In the end profits can be compared with and without a new technology.

Question 10

Explain main points of Order

Answer 10

Equilibrium model, where the position in the order of adoption matters.
- Early adoption can generate higher profits on the whole lifetime of the ownership of the new technology.

Question 11

What are the 3 sub-models of Rank?

Answer 11

i. Reinganum- considers at the beginning all firms have the same output, characteristics, and costs, with perfect information about technology.
ii. Schumpeter- bases its assumption on saying that new technology might generate profitable opportunities and thus entrepreneurs will innovate in order to pursue this.
iii. Evolutionary school- Main assumption is that in any moment of time there might be a potential production technology that firms may use and the good ones will spread across the industry because adoption leads to more adoption, similar to the epidemic model.