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

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

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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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
Contact details of provider: Web page: http://www.elsevier.com/locate/eor

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  1. repec:ner:tilbur:urn:nbn:nl:ui:12-90069 is not listed on IDEAS
  2. 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.
  3. 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.
  4. 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.
  5. Huisman, K.J.M. & Kort, P.M., 1999. "Effects of Strategic Interactions on the Option Value of Waiting," Discussion Paper 1999-92, .
  6. 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.
  7. 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.
  8. 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.
  9. Nielsen, Martin J., 2002. "Competition and irreversible investments," International Journal of Industrial Organization, Elsevier, vol. 20(5), pages 731-743, May.
  10. Huisman, K.J.M. & Kort, P.M., 2002. "Strategic technology investment under uncertainty," Other publications TiSEM 87025ba6-2254-41a0-99c6-6, School of Economics and Management.
  11. Marcel Boyer & Pierre Lasserre & Thomas Mariotti & Michel Moreaux, 2001. "Real Options, Preemption, and the Dynamics of Industry Investments," Cahiers de recherche du Département des sciences économiques, UQAM 20-10, Université du Québec à Montréal, Département des sciences économiques.
  12. 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.
  13. repec:fth:tilbur:9992 is not listed on IDEAS
  14. repec:ner:tilbur:urn:nbn:nl:ui:12-90065 is not listed on IDEAS
  15. Huisman, K.J.M. & Kort, P.M., 1999. "Strategic Technology Investment under Uncertainty," Discussion Paper 1999-18, .
  16. 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.
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