Two New Technologies

A firm that buys a new technology today faces the risk that a much better technology becomes available tomorrow. The fact that this can happen provides an incentive to delay the investment. To include this kind of mechanism, the chapter extends the models of Chapters 7 and 8 by incorporating an additional technology that becomes available at an unknown point of time in the future. This means that our model contains two different technologies that can be adopted, which are the currently available technology and a more efficient technology that becomes available at a future point of time. At the moment a firm invests, it enters the market, so, like in Chapter 8 we are considering a new market model. The reason is that we want to keep the model as simple as possible such that we are still able to point out the effects of adding an extra new technology. In this framework the possible invention of a more efficient technology raises the option value of waiting to invest in the current technology, but on the other hand the presence of a competitor may induce the firm to invest quickly, and thus forget about future technological progress.