This paper studies a dynamic duopoly in which firms compete in the adoption of new technologies. The innovation process is exogenous to the firms. It is assumed that there are two technologies. Technology 1 already exists at time zero and can be adopted any time at a given one-time cost. This is standard and leads to a preemption game. What is new in the paper is the presence of technology 2 that becomes available for adoption at some time in the future. Technology 2 is superior to technology 1 but firms cannot adopt it if they have adopted technology 1 before technology 2 arrives. The motivation to analyze a setup like this is that it provides a framework where firms take into account technological progress in making their investment decisions. Clearly this topic is important and also the results show that the addition of a superior technology appearing somewhere in the future can have substantial implications for the optimal investment decision. For example, adding technology 2 to the model turns the preemption game into a war of attrition in case of a high arrival probability. Another main result is that revenue uncertainty induces adoption of modern technologies.
REF analyze how technological uncertainty impacts the competitive equilibrium and find that when technological uncertainty becomes sufficiently large, the competition changes from a preemption game into a war of attrition.
Strategic technology adoption taking into account future technological improvements: A real options approach
Eur. J. Oper. Res.
Eur. J. Oper. Res.
Business Computer Science Economics