Scandinavian Working Papers in Economics
HomeAboutSeriesSubject/JEL codesAdvanced Search
Department of Business and Management Science, Norwegian School of Economics (NHH) Discussion Papers, Department of Business and Management Science, Norwegian School of Economics (NHH)

No 2014/26:
When is it Better to Wait for a New Version? Optimal Replacement of an Emerging Technology under Uncertainty

Michail Chronopoulos () and Afzal Siddiqui ()

Abstract: We determine the optimal timing for replacement of an emerging technology facing uncertainty in both the output price and the arrival of new versions. Via a sequential investment framework, we determine the value of the investment opportunity, the value of the project, and the optimal investment rule under three different strategies: compulsive, laggard, and leapfrog. In the first one, we assume that a firm invests sequentially in every version that becomes available, whereas in the second and third ones, it can choose an older or a newer version, respectively. We show that, under a compulsive strategy, technological uncertainty has a non–monotonic impact on the optimal investment decision. In fact, uncertainty regarding the availability of future versions may actually hasten investment in the current one. Next, by comparing the relative values of the three strategies under different rates of technological innovation, we find that, under a low output price, the compulsive strategy always dominates, whereas, at a high output price, the incentive to wait for a new version and adopt either a leapfrog or a laggard strategy increases as the rate of innovation increases, while high price uncertainty mitigates this effect.

Keywords: Investment analysis; real options; emerging technologies; (follow links to similar papers)

JEL-Codes: G11; O33; (follow links to similar papers)

32 pages, June 18, 2014

Before downloading any of the electronic versions below you should read our statement on copyright.
Download GhostScript for viewing Postscript files and the Acrobat Reader for viewing and printing pdf files.

Full text versions of the paper:

217639    PDF-file
Download Statistics

Questions (including download problems) about the papers in this series should be directed to Stein Fossen ()
Report other problems with accessing this service to Sune Karlsson () or Helena Lundin ().

Programing by
Design by Joachim Ekebom

Handle: RePEc:hhs:nhhfms:2014_026 This page was generated on 2014-12-14 19:25:18