Discussion Papers, Department of Business and Management Science, Norwegian School of Economics (NHH)
When is it Better to Wait for a New Version? Optimal Replacement of an Emerging Technology under Uncertainty
() 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
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