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When is it better to wait for a new version? Optimal replacement of an emerging technology under uncertainty
Stockholm University, Faculty of Social Sciences, Department of Computer and Systems Sciences. University College London, UK.
2015 (English)In: Annals of Operations Research, ISSN 0254-5330, E-ISSN 1572-9338, Vol. 235, no 1, 177-201 p.Article in journal (Refereed) Published
Abstract [en]

Firms that use an emerging technology often face uncertainty in both the arrival of new versions and the revenue that may be earned from their deployment. Via a sequential decision-making framework, we determine the value of the investment opportunity and the optimal replacement rule under three different strategies: compulsive, laggard, and leapfrog. In the first one, a firm invests sequentially in every version that becomes available, whereas in the second and third ones, it first waits for a new version to arrive and then either invests in the older or the 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. By comparing the relative values of the three strategies, 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. By contrast, high price uncertainty mitigates this effect, thereby increasing the relative attraction of a compulsive strategy.

Place, publisher, year, edition, pages
2015. Vol. 235, no 1, 177-201 p.
Keyword [en]
Investment analysis, Real options, Emerging technologies, Dynamic programming
National Category
Information Systems
Research subject
Computer and Systems Sciences
URN: urn:nbn:se:su:diva-122899DOI: 10.1007/s10479-015-2010-6ISI: 000365867100010OAI: diva2:868672
Available from: 2015-11-11 Created: 2015-11-11 Last updated: 2016-01-04Bibliographically approved

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Siddiqui, Afzal
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