IDEAS home Printed from https://ideas.repec.org/p/ufg/qdsems/14-2007.html
   My bibliography  Save this paper

Strategic Technology Adoption and Market Dynamics as Option Games

Author

Listed:
  • Flavia Cortelezzi
  • Giovanni Villani

Abstract

Aim of this paper is to analyse the equilibrium strategies of two firms investing in a new technology, when the probability of successful implementation is uncertain and market shares are asymmetric. In particular, we are able to consider three key feature of a new technology adoption. First, it is, at least partially, irreversible. Second, once realized, there is uncertainty about the probability of a successful implementation. Third, the profit flow generated by such an investment is subject to uncertainty according to the evolution of demand function. The first firm to enter the market sustaines the investment cost earlier, but can benefit of a higher market share with respect to the competitor. The follower has just to decide if and when realize the investment. He benefits from the resolution of uncertainty, but he suffers of a reduction in its market share. Using the method of option pricing theory, we address this issue at two levels. First, we model the investment decision of a non-cooperative firm (decentralised case) as a dynamic stochastic game. Then, we solve for the sequential monopolist as a benchmark case. We find the interaction of pre-emption and uncertainty can actually hasten, rather than delay, investment, contrary to the usual presumption.

Suggested Citation

  • 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.
    • Handle: RePEc:ufg:qdsems:14-2007
    as

    Download full text from publisher

    File URL: http://www.economia.unifg.it/sites/sd01/files/allegatiparagrafo/29-11-2016/q142007.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Huisman, Kuno J. M. & Kort, Peter M., 2004. "Strategic technology adoption taking into account future technological improvements: A real options approach," European Journal of Operational Research, Elsevier, vol. 159(3), pages 705-728, December.
    2. Dutta, Prajit K & Rustichini, Aldo, 1993. "A Theory of Stopping Time Games with Applications to Product Innovations and Asset Sales," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 3(4), pages 743-763, October.
    3. Robin Mason & Helen Weeds, 2000. "Networks, Options and Preemption," Econometric Society World Congress 2000 Contributed Papers 1721, Econometric Society.
    4. Capozza, Dennis & Li, Yuming, 1994. "The Intensity and Timing of Investment: The Case of Land," American Economic Review, American Economic Association, vol. 84(4), pages 889-904, September.
    5. Weeds, H., 1999. "Sleeping Patents and Computsory Licensing: An Options Analysis," The Warwick Economics Research Paper Series (TWERPS) 577, University of Warwick, Department of Economics.
    6. Helen Weeds, 2002. "Strategic Delay in a Real Options Model of R&D Competition," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 69(3), pages 729-747.
    7. 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.
    8. Huisman, K.J.M. & Kort, P.M., 1999. "Effects of Strategic Interactions on the Option Value of Waiting," Other publications TiSEM a867e9f4-7840-4335-83df-e, Tilburg University, School of Economics and Management.
    9. repec:fth:tilbur:9992 is not listed on IDEAS
    10. Dennis R. Capozza & Yuming Li, 2001. "Residential Investment and Interest Rates: An Empirical Test of Land Development as a Real Option," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 29(3), pages 503-519, March.
    11. Quigg, Laura, 1993. "Empirical Testing of Real Option-Pricing Models," Journal of Finance, American Finance Association, vol. 48(2), pages 621-640, June.
    12. Williams, Joseph T, 1991. "Real Estate Development as an Option," The Journal of Real Estate Finance and Economics, Springer, vol. 4(2), pages 191-208, June.
    13. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, December.
    14. Mason, Robin & Weeds, Helen, 2000. "Networks, Options and Preemption," Economic Research Papers 269346, University of Warwick - Department of Economics.
    15. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, number 5474.
    16. Joseph T. Williams, 1997. "Redevelopment of Real Assets," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 25(3), pages 387-407, September.
    17. Merton, Robert C., 1976. "Option pricing when underlying stock returns are discontinuous," Journal of Financial Economics, Elsevier, vol. 3(1-2), pages 125-144.
    18. Mason, R. & Weeds, H., 2000. "Networks, options and preemptions," Discussion Paper Series In Economics And Econometrics 0013, Economics Division, School of Social Sciences, University of Southampton.
    19. Grenadier, Steven R, 1996. "The Strategic Exercise of Options: Development Cascades and Overbuilding in Real Estate Markets," Journal of Finance, American Finance Association, vol. 51(5), pages 1653-1679, December.
    20. Mason, R. & Weeds, H., 2000. "Networks, options and preemptions," Discussion Paper Series In Economics And Econometrics 13, Economics Division, School of Social Sciences, University of Southampton.
    21. Weeds, Helen, 1999. "Sleeping Patents And Compulsory Licensing: An Options Analysis," Economic Research Papers 269348, University of Warwick - Department of Economics.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Giovanni Villani, 2009. "A Strategic R&D Investment with Flexible Development Time in Real Option Game Analysis," CESifo Working Paper Series 2728, CESifo.
    2. Flavia Cortelezzi & Giovanni Villani, 2012. "Strategic R&D Investment Under Information Revelation," The Engineering Economist, Taylor & Francis Journals, vol. 57(1), pages 20-40.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Flavia Cortelezzi & Pierpaolo Giannoccolo & Giovanni Villani, 2011. "Strategic Urban Development Under Uncertainty," The IUP Journal of Financial Economics, IUP Publications, vol. 0(4), pages 7-27, December.
    2. Lambrecht, Bart & Perraudin, William, 2003. "Real options and preemption under incomplete information," Journal of Economic Dynamics and Control, Elsevier, vol. 27(4), pages 619-643, February.
    3. Rose Neng Lai & Lawrence Hoc Nang Fong, 2021. "Development Strategies in a Market of High Vacancies and Sticky Rates – The Case of the Hotel Industry," International Real Estate Review, Global Social Science Institute, vol. 24(3), pages 363-383.
    4. Tan Lee & Jyh-Bang Jou, 2010. "Urban Spatial Development: a Real Options Approach," The Journal of Real Estate Finance and Economics, Springer, vol. 40(2), pages 161-187, February.
    5. John Clapp & Katsiaryna Bardos & Tingyu Zhou, 2014. "Expansions and Contractions of Major US Shopping Centers," The Journal of Real Estate Finance and Economics, Springer, vol. 48(1), pages 16-56, January.
    6. Clapp, John M. & Bardos, Katsiaryna Salavei & Wong, S.K., 2012. "Empirical estimation of the option premium for residential redevelopment," Regional Science and Urban Economics, Elsevier, vol. 42(1-2), pages 240-256.
    7. Lander, Diane M. & Pinches, George E., 1998. "Challenges to the Practical Implementation of Modeling and Valuing Real Options," The Quarterly Review of Economics and Finance, Elsevier, vol. 38(3, Part 2), pages 537-567.
    8. Carlos Andrés Zapata Quimbayo, 2020. "OPCIONES REALES Una guía teórico-práctica para la valoración de inversiones bajo incertidumbre mediante modelos en tiempo discreto y simulación de Monte Carlo," Books, Universidad Externado de Colombia, Facultad de Finanzas, Gobierno y Relaciones Internacionales, number 138, April.
    9. Jeffrey Stokes, 2012. "The value of the option to preserve farm real estate," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 36(1), pages 162-175, January.
    10. Chevalier-Roignant, Benoît & Flath, Christoph M. & Huchzermeier, Arnd & Trigeorgis, Lenos, 2011. "Strategic investment under uncertainty: A synthesis," European Journal of Operational Research, Elsevier, vol. 215(3), pages 639-650, December.
    11. Jyh-Bang Jou & Tan Lee, 2007. "Do Tighter Restrictions on Density Retard Development?," The Journal of Real Estate Finance and Economics, Springer, vol. 34(2), pages 225-232, February.
    12. 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.
    13. Sendstad, Lars Hegnes & Chronopoulos, Michail, 2017. "Strategic Technology Switching under Risk Aversion and Uncertainty," Discussion Papers 2017/10, Norwegian School of Economics, Department of Business and Management Science.
    14. Sendstad, Lars Hegnes & Chronopoulos, Michail, 2021. "Strategic technology switching under risk aversion and uncertainty," Journal of Economic Dynamics and Control, Elsevier, vol. 126(C).
    15. Weiß, Dominik, 2009. "Keeping the Bubble Alive! The Effects of Urban Renewal and Demolition Subsidies in the East German Housing Market," IWH Discussion Papers 11/2009, Halle Institute for Economic Research (IWH).
    16. Kuno J.M. Huisman & Peter M. Kort, 2015. "Strategic capacity investment under uncertainty," RAND Journal of Economics, RAND Corporation, vol. 46(2), pages 376-408, June.
    17. Ohyama, Atsuyuki & Tsujimura, Motoh, 2008. "Induced effects and technological innovation with strategic environmental policy," European Journal of Operational Research, Elsevier, vol. 190(3), pages 834-854, November.
    18. Andrianos Tsekrekos & George Kanoutos, 2013. "Real Options Premia Implied from Recent Transactions in the Greek Real Estate Market," The Journal of Real Estate Finance and Economics, Springer, vol. 47(1), pages 152-168, July.
    19. 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).
    20. Hans Haanappel & Han Smit, 2007. "Return distributions of strategic growth options," Annals of Operations Research, Springer, vol. 151(1), pages 57-80, April.

    More about this item

    Keywords

    Real Options; Stopping Timing Game; Asymmetric Demand.;
    All these keywords.

    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ufg:qdsems:14-2007. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Luca Grilli (email available below). General contact details of provider: https://edirc.repec.org/data/emsfoit.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.