An Option Games Model Analysis on Investment Decisions of the Adoption of New Technology

In dynamic uncertain environments, the investment timing of the firm about adopting the existing new technology is influenced by the rival's actions and technological progress. This paper exploits option games approach to examine the impact of operating costs and technological innovations on firms' strategic irreversible investment decisions. In the model, the irreversible investment in adoption of the existing new technology is in strategic competitive circumstances and facing the arrival of a further new technology after the competition setting is established, which the further new technology can reduce operating costs. The study shows that the rapid technological innovation encourages the follower's investment and discourages the leader's investment, when the operating cost reduction is greater enough and the investment cost is lower enough of the further new technology. However, the case is the opposite when the operating cost reduction isn't greater enough and the investment cost isn't lower enough of the further new technology. The higher operating cost and the larger investment cost of the existing new technology, the lower cost reduction and the larger investment cost of the further new technology, the greater volatility of the market demand, and the greater first-mover advantage delay the follower's investment, instead, hasten the leader's investment. Comparing with the optimal timing without the adoption of the further new technology, the firm delays its investment when no firm has invested; however, once one firm has invested first, the firm will hasten to invest, when the operating cost reduction is greater enough and the investment cost is lower enough of the further new technology.