Strategic Technology Switching Under Risk Aversion and Uncertainty

32 Pages Posted: 14 Sep 2017 Last revised: 28 Sep 2018

See all articles by Lars Sendstad

Lars Sendstad

Norwegian University of Science and Technology (NTNU) - Department of Industrial Economics and Technology

Michail Chronopoulos

City University London - Sir John Cass Business School; Norwegian School of Economics (NHH) - Department of Business and Management Science

Date Written: September 12, 2017

Abstract

Sequential investment opportunities or the presence of a rival typically hasten investment under risk neutrality. By contrast, greater price uncertainty or risk aversion increase the incentive to postpone investment in the absence of competition. We analyse how price and technological uncertainty, reflected in the random arrival of innovations, interact with attitudes towards risk to impact both the optimal technology adoption strategy and the optimal investment policy within each strategy, under a proprietary and a non-proprietary duopoly. Results indicate that technological uncertainty increases the follower's investment incentive and delays the entry of the non-proprietary leader, yet it does not affect the proprietary leader's optimal investment policy. Additionally, we show that technological uncertainty decreases the relative loss in the value of the leader due to the follower's entry, while the corresponding impact of risk aversion is ambiguous. Interestingly, we also find that a higher first-mover advantage with respect to a new technology does not affect the leader's entry, and that technological uncertainty may turn a pre-emption game into a war of attrition, where the second-mover gets the higher payoff.

Keywords: Investment analysis, real options, competition, risk aversion

JEL Classification: G00, G11

Suggested Citation

Sendstad, Lars and Chronopoulos, Michail, Strategic Technology Switching Under Risk Aversion and Uncertainty (September 12, 2017). NHH Dept. of Business and Management Science Discussion Paper No. 2017/10. Available at SSRN: https://ssrn.com/abstract=3035827 or http://dx.doi.org/10.2139/ssrn.3035827

Lars Sendstad (Contact Author)

Norwegian University of Science and Technology (NTNU) - Department of Industrial Economics and Technology ( email )

NO-7491 Trondheim
Norway

HOME PAGE: http://www.sendstad.com

Michail Chronopoulos

City University London - Sir John Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

HOME PAGE: http://https://www.cass.city.ac.uk/

Norwegian School of Economics (NHH) - Department of Business and Management Science ( email )

Helleveien 30
Bergen, NO-5045
Norway

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