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Information Acquisition and the Adoption of New Technology

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  • Kevin F. McCardle

    (The Fuqua School of Business, Duke University, Durham, North Carolina 27706)

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    Abstract

    The profitability of a new technology is rarely known with certainty at its announcement date. Consequently, prior to making an adoption decision it behooves the firm considering the adoption of this innovation to reduce the level of uncertainty associated with its profitability. The firm accomplishes this by sequentially gathering information, updating its prior estimate of profitability in a Bayesian manner. Quantifying the uncertainty regarding the innovation permits application of dynamic programming techniques: criteria are derived which tell the firm when to stop collecting information and make the adoption decision. It will be shown that it is optimal for the firm to continue to collect information until its estimate of profitability crosses one of two thresholds: upon crossing the upper threshold the firm adopts the technology, whereas the firm rejects the technology if the lower threshold is crossed. The model predicts that even the manager who behaves optimally will occasionally adopt unprofitable technologies and reject profitable ones.

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    File URL: http://dx.doi.org/10.1287/mnsc.31.11.1372
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    Bibliographic Info

    Article provided by INFORMS in its journal Management Science.

    Volume (Year): 31 (1985)
    Issue (Month): 11 (November)
    Pages: 1372-1389

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    Handle: RePEc:inm:ormnsc:v:31:y:1985:i:11:p:1372-1389

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    Related research

    Keywords: information systems; technology;

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    Cited by:
    1. Waśniewski, Krzysztof, 2010. "Patterns of technological progress and corporate innovation," MPRA Paper 25186, University Library of Munich, Germany.
    2. Verkerk, M. & van der Pijl, G.J. & van Asperen, E., 2009. "ICT as an Enabler for Innovation Adoption," Econometric Institute Research Papers EI 2009-15, Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute.
    3. Hagspiel, V., 2011. "Flexibility in technology choice: A real options approach," Open Access publications from Tilburg University urn:nbn:nl:ui:12-5258278, Tilburg University.
    4. Fabiano Schivardi & Martin Schneider, 2008. "Strategic Experimentation and Disruptive Technological Change," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 11(2), pages 386-412, April.
    5. Escarce, JoseJ., 1996. "Externalities in hospitals and physician adoption of a new surgical technology: An exploratory analysis," Journal of Health Economics, Elsevier, vol. 15(6), pages 715-734, December.
    6. Souza, Gilvan C., 2004. "Product introduction decisions in a duopoly," European Journal of Operational Research, Elsevier, vol. 152(3), pages 745-757, February.
    7. Alexander, Corinne E., 2002. "Role Of Information In The Decision To Adopt Genetically Modified Seed," 2002 Annual meeting, July 28-31, Long Beach, CA 19862, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    8. J. G. Smythe, 2002. "Reputation, public information, and physician adoption of an innovation," The European Journal of Health Economics, Springer, vol. 3(2), pages 103-110, June.
    9. Li, Ying & Jin, Yanhong H., 2009. "Racing to market leadership: Product launch and upgrade decisions," International Journal of Production Economics, Elsevier, vol. 119(2), pages 284-297, June.
    10. Chang, Shao-Chi & Chen, Sheng-Syan & Lai, Jung-Ho, 2008. "The effect of alliance experience and intellectual capital on the value creation of international strategic alliances," Omega, Elsevier, vol. 36(2), pages 298-316, April.
    11. Caroline Orset, 2010. "Irreversible investment and information acquisition under uncertainty," Working Papers 2010/01, INRA, Economie Publique.
    12. Philipp Köllinger & Christian Schade, 2006. "Endogenous Acceleration of Technological Change," Discussion Papers of DIW Berlin 562, DIW Berlin, German Institute for Economic Research.
    13. Jafarizadeh, Babak, 2012. "Information acquisition as an American option," Energy Economics, Elsevier, vol. 34(3), pages 807-816.

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