Consumer heterogeneity and the development of environmentally friendly technologies ☆ Paul Windrum a, ⁎, Tommaso Ciarli b,c , Chris Birchenhall d a Manchester Metropolitan University Business School, Aytoun Building, Aytoun Street, Manchester M1 3GH, UK b Manchester Metropolitan University Business School, Manchester, UK c Max Planck Institute for Economics, Jena, Germany d University of Manchester, Manchester, UK article info abstract Article history: Received 14 September 2007 Received in revised form 16 April 2008 Accepted 22 April 2008 The paper examines the effect of heterogeneous consumer demand on the generation and diffusion of environmentally benign technology paradigms. The history of the shift from horse- based to car-based transport provides the basis for an empirically grounded multi-agent model of sequential technology competitions. Firms compete on price, product quality, and the environmental sustainability of their products, and improve their market position through product innovation. The trajectory of product innovation is shaped by the distribution of heterogeneous consumer preferences with regards to quality, price, and the environmental impact of consumption. The distribution of consumer preferences determines whether cleaner designs are developed within a technology paradigm, whether new, more environmentally benign paradigms are developed, and whether these new paradigms replace older, environmentally harmful technology paradigms. © 2008 Elsevier Inc. All rights reserved. Keywords: Heterogeneous consumer preferences Innovation Environmental technologies Paradigm substitutions 1. Introduction Under what conditions can new, more environmentally friendly technologies displace established, strongly polluting technologies? In this paper we focus on the role played by heterogeneous consumer preferences in the development of new technology paradigms. In particular, we examine the way in which current pollution, created by the use of an established technology, stimulates some consumers to search for new, cleaner technologies. Herein lies a potentially important source of endogenous technological and environmental change. How influential are highly concerned ‘green consumers’ (eco-warriors) who seek to develop radically new lifestyles? Are other individuals able to emulate these radical environmental consumers? Alternatively, is it more realistic for everyone to improve their consumption patterns slightly, rather than attempt to shift to a radically new lifestyle? What type of policies should government develop under these different conditions? To address these questions, we develop an empirically grounded model of sequential technology competition. Empirically grounded modelling uses empirical data, in the form of datasets and case studies, to inform the development of a model's micro features (the features and behaviours of agents, and their interactions) and the set of industry/macro level observations that are used to test the validity of outputs generated by the model. 1 The empirical case study that guides our modelling process is the history of the switch from horse-based transport systems to car-based transport systems. This case study provides empirical data Technological Forecasting & Social Change 76 (2009) 533–551 ☆ The authors gratefully acknowledge funding through the Public-Private Services Innovation (ServPPIN) project, funded through the Socio-Economic Sciences and Humanities Programme of the EU 7th Framework. We thank the two anonymous journal referees for their excellent comments and suggestions on how to improve the original draft of the paper. ⁎ Corresponding author. E-mail address: p.windrum@mmu.ac.uk (P. Windrum). 1 For an in-depth discussion of the empirical validation of simulation models, the interested reader is referred to a series of papers contained in the special issue of Computational Economics, edited by Birchenhall et al. [1]. 0040-1625/$ – see front matter © 2008 Elsevier Inc. All rights reserved. doi:10.1016/j.techfore.2008.04.011 Contents lists available at ScienceDirect Technological Forecasting & Social Change