Chronopoulos, M;
Siddiqui, AS;
(2015)
When is it Better to Wait for a New Version? Optimal Replacement of an Emerging Technology under Uncertainty.
Annals of Operations Research
, 235
(1)
pp. 177-201.
10.1007/s10479-015-2010-6.
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Abstract
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.
| Type: | Article |
|---|---|
| Title: | When is it Better to Wait for a New Version? Optimal Replacement of an Emerging Technology under Uncertainty |
| Open access status: | An open access version is available from UCL Discovery |
| DOI: | 10.1007/s10479-015-2010-6 |
| Publisher version: | http://doi.org/10.1007/s10479-015-2010-6 |
| Language: | English |
| Additional information: | © Springer Science+Business Media New York 2015. The final publication is available at Springer via http://dx.doi.org/10.1007/s10479-015-2010-6 |
| Keywords: | Investment analysis; Real options; Emerging technologies; Dynamic programming |
| UCL classification: | UCL UCL > Provost and Vice Provost Offices > UCL BEAMS UCL > Provost and Vice Provost Offices > UCL BEAMS > Faculty of Maths and Physical Sciences UCL > Provost and Vice Provost Offices > UCL BEAMS > Faculty of Maths and Physical Sciences > Dept of Statistical Science |
| URI: | https://discovery.ucl.ac.uk/id/eprint/1471010 |
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