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Technology Adoption in a Declining Market

Author

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  • Hagspiel, V.

    (Tilburg University, Center For Economic Research)

  • Huisman, Kuno

    (Tilburg University, Center For Economic Research)

  • Kort, Peter M.

    (Tilburg University, Center For Economic Research)

  • Lavrutich, Maria

    (Tilburg University, Center For Economic Research)

  • Nunes, Claudia
  • Pimentel, Rita

Abstract

Rapid technological developments are inducing the shift in consumer demand from existing products towards new alternatives. When operating in a declining market, the profitability of incumbent firms is largely dependent on the ability to correctly time the introduction of product innovations. This paper contributes to the existing literature on technology adoption by determining the optimal time to innovate in the context of a declining market. We study the problem of a firm that has an option to undertake the innovation investment and thereby either to add a new product to its portfolio (add strategy) or to replace the established product by the new one (replace strategy). We find that it can be optimal for the firm to innovate not only because of the significant technological improvement, but also due to demand saturation. In the latter case profits of the established product may become so low that the firm will adopt a new technology even if the newest available innovation has not improved for some time. This way, our approach allows to explicitly account for the effect of a decline in the established market on technology adoption. Furthermore, we find that a substantial cannibalization effect occurring under the add strategy results in an inaction region. In this region the firm waits with innovation until the current technology level becomes either low enough to apply the add strategy, or the new technology becomes advanced enough to apply the replace strategy.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Hagspiel, V. & Huisman, Kuno & Kort, Peter M. & Lavrutich, Maria & Nunes, Claudia & Pimentel, Rita, 2018. "Technology Adoption in a Declining Market," Discussion Paper 2018-021, Tilburg University, Center for Economic Research.
    • Handle: RePEc:tiu:tiucen:b039cdad-73d9-4db0-a4f6-eb044f0b83a9
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    Cited by:

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    3. Demirci, Ece Zeliha & Erkip, Nesim, 2024. "Integrating efforts for product development and market penetration," European Journal of Operational Research, Elsevier, vol. 312(3), pages 927-937.
    4. Nunes, Cláudia & Oliveira, Carlos & Pimentel, Rita, 2021. "Quasi-analytical solution of an investment problem with decreasing investment cost due to technological innovations," Journal of Economic Dynamics and Control, Elsevier, vol. 130(C).
    5. Jing, Fei & Lin, Jun & Zhang, Qiao & Qian, Yanjun, 2022. "New technology introduction and product rollover strategies," European Journal of Operational Research, Elsevier, vol. 302(1), pages 324-336.
    6. Peter Kort & Maria Lavrutich & Cláudia Nunes & Carlos Oliveira, 2022. "Preventing Environmental Disasters in Investment under Uncertainty," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 83(1), pages 199-220, September.
    7. Chevalier-Roignant, Benoît & Flath, Christoph M. & Kort, Peter M. & Trigeorgis, Lenos, 2021. "Capacity investment choices under cost heterogeneity and output flexibility in oligopoly," European Journal of Operational Research, Elsevier, vol. 290(3), pages 1154-1173.

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    More about this item

    Keywords

    Technology adoption; Declining demand; Product innovation; Dynamic programming;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes

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