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Strategic technology adoption taking into account future technological improvements: A real options approach

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  • Huisman, Kuno J. M.
  • Kort, Peter M.

Abstract

This paper studies a dynamic duopoly in which firms compete in the adoption of new technologies. The innovation process is exogenous to the firms. Both firms have the possibility to adopt a current technology or to wait for a better technology that arrives at an unknown point of time in the future. At the moment that a firm invests it enters a new market with a profit flow that follows a stochastic Brownian motion process. Results turn out to largely depend on the probability that a new technology arrives in the immediate future. If this probability is low, firms only take the current technology into account, which results in the usual preemption game. Increasing this probability gradually changes the outcome from a preemption game where both firms adopt the current technology, to a preemption game where the follower will adopt the new technology. Increasing the probability of arrival of the new technology further, turns the preemption game into a war of attrition where the follower adopting the new technology is better of than the leader. Finally, when the probability of arrival of a new technology is really large, both firms will adopt the new technology.

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Bibliographic Info

Article provided by Elsevier in its journal European Journal of Operational Research.

Volume (Year): 159 (2004)
Issue (Month): 3 (December)
Pages: 705-728

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Handle: RePEc:eee:ejores:v:159:y:2004:i:3:p:705-728

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References

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  1. Huisman, Kuno J. M. & Kort, Peter M., 2003. "Strategic investment in technological innovations," European Journal of Operational Research, Elsevier, vol. 144(1), pages 209-223, January.
  2. Huisman, K.J.M. & Kort, P.M., 1999. "Effects of Strategic Interactions on the Option Value of Waiting," Discussion Paper 1999-92, Tilburg University, Center for Economic Research.
  3. Stenbacka, Rune & Tombak, Mihkel M., 1994. "Strategic timing of adoption of new technologies under uncertainty," International Journal of Industrial Organization, Elsevier, vol. 12(3), pages 387-411, September.
  4. Marcel Boyer & Pierre Lasserre & Thomas Mariotti & Michel Moreaux, 2001. "Real Options, Preemption, and the Dynamics of Industry Investments," CIRANO Working Papers 2001s-64, CIRANO.
  5. Huisman, K.J.M. & Kort, P.M., 1999. "Strategic Technology Investment under Uncertainty," Discussion Paper 1999-18, Tilburg University, Center for Economic Research.
  6. Gotz, Georg, 2000. "Strategic timing of adoption of new technologies under uncertainty: A note," International Journal of Industrial Organization, Elsevier, vol. 18(2), pages 369-379, February.
  7. Hendricks, Ken & Weiss, Andrew & Wilson, Charles A, 1988. "The War of Attrition in Continuous Time with Complete Information," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 29(4), pages 663-80, November.
  8. Fudenberg, Drew & Tirole, Jean, 1985. "Preemption and Rent Equilization in the Adoption of New Technology," Review of Economic Studies, Wiley Blackwell, vol. 52(3), pages 383-401, July.
  9. repec:fth:tilbur:9992 is not listed on IDEAS
  10. Grenadier, Steven R. & Weiss, Allen M., 1997. "Investment in technological innovations: An option pricing approach," Journal of Financial Economics, Elsevier, vol. 44(3), pages 397-416, June.
  11. Nielsen, Martin J., 2002. "Competition and irreversible investments," International Journal of Industrial Organization, Elsevier, vol. 20(5), pages 731-743, May.
  12. Hoppe, Heidrun C., 2000. "Second-mover advantages in the strategic adoption of new technology under uncertainty," International Journal of Industrial Organization, Elsevier, vol. 18(2), pages 315-338, February.
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Citations

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Cited by:
  1. Adkins, Roger & Paxson, Dean, 2013. "Deterministic models for premature and postponed replacement," Omega, Elsevier, vol. 41(6), pages 1008-1019.
  2. Formaneck, Steven D. & Cozzarin, Brian P., 2013. "Technology adoption and training practices as a constrained shortest path problem," Omega, Elsevier, vol. 41(2), pages 459-472.
  3. Gianluca Femminis & Gianmaria Martini, 2008. "Irreversible R&D investment with inter-firm spillovers," DISCE - Quaderni dell'Istituto di Teoria Economica e Metodi Quantitativi compila la segreteria, Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE).
  4. Tyrone Lin, 2010. "Assessment of decision-making regarding market entry/exit for technology innovation," Quality & Quantity: International Journal of Methodology, Springer, vol. 44(3), pages 447-457, April.
  5. Flavia Cortelezzi & Giovanni Villani, 2007. "Strategic Technology Adoption and Market Dynamics as Option Games," Quaderni DSEMS 14-2007, Dipartimento di Scienze Economiche, Matematiche e Statistiche, Universita' di Foggia.
  6. Khansa, Lara & Liginlal, Divakaran, 2009. "Valuing the flexibility of investing in security process innovations," European Journal of Operational Research, Elsevier, vol. 192(1), pages 216-235, January.
  7. BOBTCHEFF Catherine, 2008. "Real Options and Technology Choice under Bertrand Competition," LERNA Working Papers 08.16.260, LERNA, University of Toulouse.
  8. Azevedo, Alcino & Paxson, Dean, 2014. "Developing real option game models," European Journal of Operational Research, Elsevier, vol. 237(3), pages 909-920.
  9. Marcel Boyer & Pierre Lasserre & Michel Moreaux, 2007. "The Dynamics of Industry Investments," CIRANO Working Papers 2007s-09, CIRANO.
  10. Siddiqui, Afzal & Takashima, Ryuta, 2012. "Capacity switching options under rivalry and uncertainty," European Journal of Operational Research, Elsevier, vol. 222(3), pages 583-595.
  11. Huisman, K.J.M. & Kort, P.M., 2013. "Strategic Capacity Investment Under uncertainty," Discussion Paper 2013-003, Tilburg University, Center for Economic Research.
  12. Boyer, Marcel & Lasserre, Pierre & Moreaux, Michel, 2012. "A dynamic duopoly investment game without commitment under uncertain market expansion," International Journal of Industrial Organization, Elsevier, vol. 30(6), pages 663-681.
  13. Besanko, David & Doraszelski, Ulrich & Lu, Lauren Xiaoyuan & Satterthwaite, Mark, 2010. "On the role of demand and strategic uncertainty in capacity investment and disinvestment dynamics," International Journal of Industrial Organization, Elsevier, vol. 28(4), pages 383-389, July.
  14. Femminis, Gianluca & Martini, Gianmaria, 2011. "Irreversible investment and R&D spillovers in a dynamic duopoly," Journal of Economic Dynamics and Control, Elsevier, vol. 35(7), pages 1061-1090, July.

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