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Networks, options and preemptions

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  • Mason, R.
  • Weeds, H.

Abstract

This paper examines the irreversible adoption of a technology whose returns are uncertain, when there is an advantage to being the first adopter, but a network advantage to adopting when others also do so. Two patterns of adoption emerge: sequential, in which the leader aggressively preempts its rival; and a more accommodating outcome in which the firms adopt simultaneously. There are two main results. First, conditional on adoption being sequential, the follower adopts at the incorrect point, compared to the co-operative solution. The leader adopts at the co-operative point when there is no preemption, and too early if there is preemption. Secondly, there is insufficient simultaneous adoption in equilibrium. The paper examines the effect of uncertainty, network effects and preemption on these inefficiencies. Standard results do not always hold. Preemption may actually increase the time to first adoption, since simultaneous adoption is more likely to occur in equilibrium with preemption. The analysis also raises the unusual possibility that an increase in uncertainty may cause the first mover to adopt the technology earlier.

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Bibliographic Info

Paper provided by Economics Division, School of Social Sciences, University of Southampton in its series Discussion Paper Series In Economics And Econometrics with number 0013.

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Date of creation: 01 Jan 2000
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Handle: RePEc:stn:sotoec:0013

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Cited by:
  1. Kort, P.M. & Pawlina, G., 2003. "Strategic capital budgeting: Asset replacement under uncertainty," Open Access publications from Tilburg University urn:nbn:nl:ui:12-123062, Tilburg University.
  2. Pawlina, G. & Kort, P.M., 2001. "Real Options in an Aymmetric Duopoly: Who Benefits from your Competitive Disadvantage," Discussion Paper, Tilburg University, Center for Economic Research 2001-95, Tilburg University, Center for Economic Research.
  3. Lambrecht, Bart & Perraudin, William, 2003. "Real options and preemption under incomplete information," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 27(4), pages 619-643, February.
  4. Tyrone Lin, 2010. "Assessment of decision-making regarding market entry/exit for technology innovation," Quality & Quantity: International Journal of Methodology, Springer, Springer, vol. 44(3), pages 447-457, April.
  5. Levine, Paul L & Rickman, Neil & Tzavara, Dionisia, 2002. "Market Entry and Roll-out With Product Differentiation," CEPR Discussion Papers, C.E.P.R. Discussion Papers 3237, C.E.P.R. Discussion Papers.
  6. Flavia Cortelezzi & Giovanni Villani, 2007. "Strategic Technology Adoption and Market Dynamics as Option Games," Quaderni DSEMS, Dipartimento di Scienze Economiche, Matematiche e Statistiche, Universita' di Foggia 14-2007, Dipartimento di Scienze Economiche, Matematiche e Statistiche, Universita' di Foggia.

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