Demand-supply coevolution with multiple increasing returns: Policy analysis for unlocking and system transitions

Currently, there is much concern about how to make a transition away from environmentally unsustainable activities to sustainable ones, notably in agriculture, energy and transport sectors. The success of such a transition depends on whether one is capable of escaping the lock-in of the dominant, unsustainable technology, which is usually due to multiple lock-in factors. Here, we present a formal model to study the likelihood of market lock-in in the presence of multiple increasing returns. The proposed framework describes coevolving populations of boundedly rational consumers and innovating firms. On the demand side, we focus attention on the interdependence of consumer preferences. We examine the impact of alternative demand side specifications on the direction of innovative activities of firms. On the supply side, a technological trajectory arises from the interplay of incremental innovation, search for a new product design and marketing activities. Our framework provides a general and complete account of increasing returns on supply and demand sides, as well as their synergetic interactions. The model is used to study a number of policy instruments aimed at escaping lock-in.