Strategic Technology Adoptation Taking into Account Future Technological Improvements: A Real Options Approach

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.Technological uncertainty;Adoption;Preemption;War of attrition;Real options

Strategic Technology Investment under Uncertainty

technology adoption;strategic interaction;investment irreversibility;timing games;information technology investment

Technology Investment: A Game Theoretic Real Options Approach.

The technology investment decision of an individual firm has become a very complex matter in recent years. One reason is the incredibly rapid progress of technological developments in the last decades. Another reason is the existence of and movement towar oligopolistic markets. In this thesis several theoretical technology investment models of the firm are developed and analyzed. To solve these models real options theory and game theory is used. The real options theory makes it possible to explicitly take nto account (and value) the option value of waiting. Game theory is used to incorporate strategic interactions.

The Effects of Information on Strategic Investment and Welfare

A model is considered where two firms compete in investing in a risky project. At certain points in time the firms obtain imperfect information about the profitability of the project. We impose that investing first can be beneficial because a Stackelberg advantage, and thus a higher market share, is obtained. On the other hand, investing as second implies that one can benefit from an information spillover generated by the investment of the other firm. Consequently, in equilibrium there is either a preemption situation or a war of attrition. In case no investment takes place during the war of attrition, this war of attrition can turn into a preemption situation. One counterintuitive result is that welfare can be negatively affected by signals becoming more informative or by occuring more frequently. Furthermore, simulations indicate that duopoly leads to higher welfare than monopoly when signals are less informative, wheras the opposite holds if there is more or better information.

Strategic Investment Under Uncertainty and Information Spillovers

uncertainty;investment;options;welfare

Investment in High-Tech Industries: An Example from the LCD Industry

This paper considers a representative firm taking investment decisions in a high-tech environment where different generations of products are invented over time. First, we develop a real options investment model in which, according to standard practice, the sales price and the unit production cost both satisfy a geometric Brownian motion (GBM) process. However, from real life data of the LCD industry it follows that output prices behave according to a crystal cycle that does not match a GBM. We proceed by conducting a thorough econometric analysis, leading to the conclusion that a vector autoregressive model (V AR) provides the best fit. Integrating this model with the real options machinery, we find that (i) at the moment of investment the increased production capacity goes along with increasing production cost and decreasing price, (ii) a management effect is present in the sense that a price drop is followed by a cost decrease due to management pushing harder on cost decreasing programs, and (iii) investing can be optimal while at the same time a GBM yields a negative net present value (NPV). We also find that investment decisions taken in practice are better supported by our V AR model than by the standard real options model based on GBM.High-tech Investment;Investment under Uncertainty;Product Innovation;Real Options;Vector Autoregressive Model

Finite Project Life and Uncertainty Effects on Investment

This paper revisits the important result of the real options approach to investment under uncertainty, which states that increased uncertainty raises the value of waiting and thus decelerates investment.Typically in this literature projects are assumed to be perpetual.However, in today.s economy .rms face a fast-changing technology environment, implying that investment projects are usually considered to have a .nite life.The present paper studies investment projects with .nite project life, and we .nd that, in contrast with the existing theory, investments may be accelerated by increased uncertainty.It is shown that this particularly happens when uncertainty is limited and project life is short.investment;uncertainty;finite project length

Optimal Timing of Technology Adoption

technological change;investment;innovation;uncertainty;optimization