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

Chronopoulos, Michail; Siddiqui, Afzal
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http://hdl.handle.net/11250/217638
Utgivelsesdato
2014-06
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  • Discussion papers (FOR) [509]
Sammendrag
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.
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