The aim of this paper is to analyze the equilibrium strategies of two firms investing in a new technology, when the probability of successful implementation is uncertain and market shares are asymmetric. In particular, this paper considers three key features of a new technological adoption. First, it is, at least partially irreversible. Second, once realized, there is uncertainty about the probability of a successful implementation. Third, the profit flow generated by such an investment is subject to uncertainty according to the evolution of demand function. Using the method of option pricing theory, it is shown that two types of equilibria exist and derive critical levels of parameters, separating the regions in which they prevail. Moreover, it was found that the interaction of preemption and uncertainty can actually hasten, rather than delay investment, contrary to the usual presumption. Finally, the model is solved for a sequential monopolist, as a benchmark case to discuss the implications of optimal exercise strategies and show that, in some cases, it may be desirable.

The timing and nature of new technology adoption are fundamental issues in the understanding of firm performance and competitiveness. There are two commonly observed empirical regularities of the new technological adoption. First, it is in general, anything but instantaneous.1 Second, once initial adoption occurs, the inter-firm diffusion path tends to be S-shaped, i.e., some firms adopt early and others late, with an accelerating adoption process when most firms have adopted.2 This paper is a contribution to the areas of new technological adoption and investment under uncertainty. Adoption decisions are often difficult to reverse and the time of acquiring a new technology is a key strategic decision for a firm. Early adoption can beexpensive, but could yield a significant competitive advantage. The aim of this paper is to enrich the understanding of strategic investment decisions in new technologies, that can be either new processes or products, including a key characteristic of new technologies, i.e., the uncertainty of a successful implementation. The model considers the investment decisions of a couple of firms, which must decide when to adopt a new technology available in the market. For simplicity, it is assumed that there are no operating costs and moreover, the investment expenditure is known and fixed, but once made, it is irreversible (i.e., it is a sunk cost that cannot be recovered). Firms face two kinds of uncertainty. First, there is exogenous uncertainty about market conditions. Second, there is uncertainty about the successful implementation of the new technology.

The basic assumptions adopted here can be contrasted with those of Fudenberg and Tirole (1985), Smets (1991), Dixit and Pindyck (1994), Stenbacka and Tombak (1994), Grenadier (1996) and Hoppe (2000). Concerning the area of technology adoption, this article is closely related to the seminal contribution of Fudenberg and Tirole (1985). They study a duopoly game, with identical firms, with the option to upgrade their technology. To do so, they have to pay a sunk cost, decreasing over time. Thus, the later the firm acquires the technology, the lesser it costs. It follows that the optimal investment decision faces a trade-off in the sense that investing soon implies that the firm can produce more efficiently from an early point in time, but on the other hand large sunk costs have to be paid.

Strategic Technology Adoption, Market Dynamics, Technological adoption, Cobb-Douglas production function, C-D function, Small to medium-sized organisations, SMEs, Enterprise information management, EIM, CMDB initiatives, Software as a service, SaaS, Virtualization technologies.