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Technology Adoption with Multiple Alternative Designs and the Option to Wait

Technology Adoption with Multiple Alternative Designs and the Option to Wait Technology adoption is one the most important elements of a firm's strategy. In this paper, we address an essential, yet largely overlooked, question: What should a firm do when faced with several alternative proprietary designs of a new technology? In our base case we assume there are two technology designs, each described by an independent stochastic process of technology evolution. We show that, in equilibrium, a buyer chooses the leading technology design as soon as the discounted payoff from doing so is positive. When the option value of waiting is very high, it is jointly optimal to delay adoption. But because sellers cannot commit not to extract all of the buyer's future rents, inefficiently early adoption takes place. Strategies that improve commitment to low future license fees, such as increasing the number of competitors or cross‐licensing, may alleviate the hold up problem. Although previous research stressed the benefit of such commitments in terms of increasing the rate of technology adoption, we present a class of cases when the benefit from commitment is efficiently to delay adoption. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Economics & Management Strategy Wiley

Technology Adoption with Multiple Alternative Designs and the Option to Wait

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References (46)

Publisher
Wiley
Copyright
© 2008, The Author(s) Journal Compilation © 2008 Blackwell Publishing
ISSN
1058-6407
eISSN
1530-9134
DOI
10.1111/j.1530-9134.2008.00183.x
Publisher site
See Article on Publisher Site

Abstract

Technology adoption is one the most important elements of a firm's strategy. In this paper, we address an essential, yet largely overlooked, question: What should a firm do when faced with several alternative proprietary designs of a new technology? In our base case we assume there are two technology designs, each described by an independent stochastic process of technology evolution. We show that, in equilibrium, a buyer chooses the leading technology design as soon as the discounted payoff from doing so is positive. When the option value of waiting is very high, it is jointly optimal to delay adoption. But because sellers cannot commit not to extract all of the buyer's future rents, inefficiently early adoption takes place. Strategies that improve commitment to low future license fees, such as increasing the number of competitors or cross‐licensing, may alleviate the hold up problem. Although previous research stressed the benefit of such commitments in terms of increasing the rate of technology adoption, we present a class of cases when the benefit from commitment is efficiently to delay adoption.

Journal

Journal of Economics & Management Strategy – Wiley

Published: Jun 1, 2008

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