Strategic technology investment under uncertainty

In this paper the technology investment decision of a firm is analyzed, while competition on the output market is explicitly taken into account. Technology choice is irreversible and the firms face a stochastic innovation process with uncertainty about the speed of arrival of new technologies. The innovation process is exogenous to the firms. For reasons of market saturation and the fact that more modern technologies are invented as time passes, the demand for a given technology decreases over time. This implies that also the sunk cost investment of each technology decreases over time. The investment decision problem is transformed into a timing game, in which the waiting curve is introduced as a new concopt. An algorithm is designed for solving this (more) general timing game. The algorithm is applied to an information technology investment problem. The most likely outcome exhibits diffusion with equfal payoffs for the firms. Received: December 16, 1999 / Accepted: February 7, 2001