This project examines the investment decisions of firms in industries where new products are introduced. In the Economics literature, certain patterns of growth and evolution of new industries have been postulated theoretically, and verified statistically. Commencing with the introduction of the new product, there is a "growth era" during which existing firms make substantial profits and new producers enter the market, then follows a "shakeout period" when prices and profitability decrease and some firms leave the market. Finally a "mature era" prevails, during which a stabilization in both prices and the number of firms occurs. Previous studies of many industries have found common patterns of market activity during these three evolutionary stages. For instance, during the "growth era" productive capacity increases following an S-curve whereas output rises at a decreasing rate. Prices decline over time at a decreasing rate, and there is a substantial variance in the length of each stage, and the pattern of diffusion for different products. This project applies Bayesian learning models to study the investment decisions of firms at various stages in the evolutionary process. These models incorporate uncertainty, typically concerning demand for the products, time delays between action and the payoff to that action, and learning from experience. The general types of models include capacity expansion with fixed demand, capacity adjustment with changing demand, inventory adjustment, and price setting. %%% This project examines the investment decisions of firms in industries where new products are introduced. In the Economics literature, certain patterns of growth and evolution of new industries have been postulated theoretically, and verified statistically. Commencing with the introduction of the new product, there is a "growth era" during which existing firms make substantial profits and new producers enter the market, then follows a "shakeout period" when prices and profitability decrease and some firms leave the market. Finally a "mature era" prevails, during which a stabilization in both prices and the number of firms occurs. These stages have been observed in the adoption of steam power, diesel locomotives, computers, and in a general cross-section of new industrial products. During the evolution of the industry, firms gain more information about the market in which they are operating, for example demand for the product, and about the actions of other firms in the same market. This added information influences the firms' decisions concerning investment in new production processes, output capacity, and hiring. Gaining an understanding of the evolutionary process of industries and the diffusion of new technologies holds the promise of increasing our knowledge about productivity, investment in research and development, and industrial innovation.
