Strategic Technology Adoption under Technological Uncertainty

Abstract:     
This paper studies technology adoption in a duopoly where the unbiased technological change improves production efficiency. Technological progress is exogenous and modeled as a jump process with a drift. There is always a Markov perfect equilibrium in which the firm with more efficient technology never preempts its rival. Also, a class of equilibria may exist that lead to a smaller industry surplus. In these equilibria either of the firms may preempt its rival in a set of technology efficiency values. The first investment does not necessarily happen at the boundary of this set due to the discrete nature of the technology progress. The set shrinks and eventually disappears when the difference between firms’ efficiencies increases.

Number of Pages in PDF File: 78

Keywords: uncertainty, strategic investment, technology adoption

JEL Classification: C61, C73, D81, O33

working papers series