Strategic Technology Switching under Risk Aversion and Uncertainty

Abstract

Sequential investment opportunities or the presence of a rival typically hasten investment under risk neutrality. By contrast, greater price uncertainty or risk aversion increase the incentive to postpone investment in the absence of competition. We analyse how price and technological uncertainty, reflected in the random arrival of innovations, interact with attitudes towards risk to impact both the optimal technology adoption strategy and the optimal investment policy within each strategy, under a proprietary and a non-proprietary duopoly. Results indicate that technological uncertainty increases the follower's investment incentive and delays the entry of the non-proprietary leader, yet it does not affect the proprietary leader's optimal investment policy. Additionally, we show that technological uncertainty decreases the relative loss in the value of the leader due to the follower's entry, while the corresponding impact of risk aversion is ambiguous. Interestingly, we also find that a higher first-mover advantage with respect to a new technology does not affect the leader's entry, and that technological uncertainty may turn a pre-emption game into a war of attrition, where the second-mover gets the higher payoff.