When is it better to wait for a new version? : optimal replacement of an emerging technology under uncertainty
Working paper

View/ Open
Date
2014-06Metadata
Show full item recordCollections
- Discussion papers (FOR) [575]
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.