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

Tilburg University Center for Economic Research Working Paper No. 52

42 Pages Posted: 14 Nov 2000

See all articles by Kuno Huisman

Kuno Huisman

Tilburg University, CentER; ASML

Peter M. Kort

Tilburg University - Department of Econometrics & Operations Research; Tilburg University - Center for Economic Research (CentER)

Date Written: May 2000

Abstract

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 attribution where the follower adopting the new technolgy is better off than the leader. Finally, when the probability of arrival of a new technology is really large, both firms will adopt the new technolgy.

Keywords: Technological uncertainty, Adoption, Preemption, War of attrition, Real options

JEL Classification: G31, L13, O31, O32

Suggested Citation

Huisman, Kuno J.M. and Kort, Peter, Strategic Technology Adoption Taking into Account Future Technological Improvements: A Real Options Approach (May 2000). Tilburg University Center for Economic Research Working Paper No. 52, Available at SSRN: https://ssrn.com/abstract=246980 or http://dx.doi.org/10.2139/ssrn.246980

Kuno J.M. Huisman

Tilburg University, CentER ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

ASML ( email )

De Run 6501
Veldhoven, 5504 DR
Netherlands

Peter Kort (Contact Author)

Tilburg University - Department of Econometrics & Operations Research ( email )

Tilburg, 5000 LE
Netherlands
+31 13 466 2062 (Phone)
+31 13 466 3072 (Fax)

HOME PAGE: http://center.uvt.nl/staff/kort/

Tilburg University - Center for Economic Research (CentER) ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands
+31 13 466 2062 (Phone)
+31 13 466 3072 (Fax)

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
642
Abstract Views
3,255
rank
51,620
PlumX Metrics