Adoption of cost-reducing technology by asymmetric duopolists in stochastically evolving markets

This work considers the adoption of technology that will reduce unit production costs by one or two players sharing a single market. Three models are developed involving a monopolist, a Stackelberg game with two firms and a designated order of adoption, and an open loop game with no prespecified order of adoption. In the “two-firm” cases the firms are allowed to differ in per unit production costs both before and after technology adoption, as well as the capital outlay required for adoption. In each setting, an evolution of market size is manifested by the level of an exogenous parameter which evolves according to geometric Brownian motion. Structural and numerical results are presented that help to explain the logic and optimal timing of technology adoption. The inclusion of cost and investment level asymmetry leads to a variety of cases. In some instances the high-cost firm is the first to adopt, and adopts at the point that maximizes its profits. In other cases, the higher-cost firm is the first to adopt but the timing of its adoption is dictated by the threat that its rival can make a pre-emptive move. In some cases the lower-cost firm does pre-empt its higher-cost rival and it is optimal for the higher-cost firm to sit idle while this happens. Such an outcome is possible even when both firms have the same per unit production costs after adoption. This work expands on existing literature in that it is the first to consider output rate selection, pricing decisions and technology investments in a continuous time framework while considering a real deferral option and asymmetric players.[Supplementary materials are available for this article. Go to the publisher's online edition of IIE Transactions for the following free supplemental resource: Appendix]