On the Choice of Inferior Technologies : A Paradox of Backward Technology

This paper explores the choice of technology in quantity setting oligopolies producing homogenous products where two types of firms exist. Firms with relatively advanced technology are considered to adopt sophisticated Cournot strategy while the remaining with backward technology follow Walrasian behavior. In addition to showing the possibility of a Walrasian competitor outperforming its Cournot counterparts despite of technology disadvantage, this paper documents a seemingly paradoxical observation that an increase in production cost for the backward may lead to higher pro ts for not only the advanced but also the backward themselves. Consequently, it is of interest of backward firms to collectively adopt inferior technologies in pursuit of higher profits, a statement against the factural conclusions suggested by common sense that RMs would always prefer to choose the lowest-cost technology available. In line with this paradox, the paper also investigates the impact of technological change industry wise represented by variation in the relative advanced-backward proportion in the oligopoly