The commercial effects of technical change: A case study of the steam turbine-generator market

There is an apparent inconsistency between the fact there are many possible ways in which technical change affects a firm and the reported empirical findings on these effects that largely assume a narrow subset of these possibilities. As a remedy, this study proposes estimating the commercial effects of technical change from the firm's profits. This metric is superior to mainstream approaches because it accounts for all the possible effects, including revenue increases and cost decreases.;Using a data set of steam turbine-generators sold by General Electric and Westinghouse between 1958 and 1964, the mainstream effect of technical change estimated from a variable cost function is contrasted with the commercial effects estimated from a short-run profit function. The principal finding is that this mainstream approach under-reports the returns to technical change by a substantial margin. The findings also show that revenue increasing innovation strategies are pursued even if they elevate the costs of production. Finally, even though one firm was the technology follower throughout the sample period, it was profitable because a segment of the market preferred to buy less expensive, less technologically advanced products.