Technology Adoption in a Declining Market

V. Hagspiel, Kuno Huisman, Peter Kort, Maria Lavrutich, Claudia Nunes, Rita Pimentel

Research output: Working paperDiscussion paperOther research output

Abstract

Rapid technological developments are inducing the shift in consumer demand from existing products towards new alternatives. When operating in a declining market, the profitability of incumbent firms is largely dependent on the ability to correctly time the introduction of product innovations. This paper contributes to the existing literature on technology adoption by considering the optimal innovation investment in the context of the declining market. We study the problem of a firm that has an option to undertake the innovation investment and thereby either to add a new product to its portfolio (add strategy) or to replace the established product by the new one (replace strategy). We are able to quantify the value of the option to adopt a new technology, as well as the optimal timing to exercise it. We find that it can be optimal for the firm to innovate not only because of the significant technological improvement, but also due to demand saturation. In the latter case profits of the established product
may become so low that the firm will adopt a new technology even if the newest available innovation has not improved for some time. This way, our approach allows to explicitly account for the effect of a decline in the established market on technology adoption. Furthermore, we find that under certain conditions an inaction region exists, in which the firm does not innovate, while for lower technology levels it applies the add strategy and for higher technology levels the replace strategy.
LanguageEnglish
Place of PublicationTilburg
PublisherCentER, Center for Economic Research
Number of pages51
Volume2018-021
StatePublished - 9 Jul 2018

Publication series

NameCentER Discussion Paper
Volume2018-021

Fingerprint

Technology adoption
Innovation
Technological development
Consumer demand
Profitability
Product innovation
Exercise
Profit
Incumbents
New products
Optimal timing
High technology

Keywords

  • Technology adoption
  • Declining demand
  • Product innovation
  • Dynamic programming

Cite this

Hagspiel, V., Huisman, K., Kort, P., Lavrutich, M., Nunes, C., & Pimentel, R. (2018). Technology Adoption in a Declining Market. (CentER Discussion Paper; Vol. 2018-021). Tilburg: CentER, Center for Economic Research.
Hagspiel, V. ; Huisman, Kuno ; Kort, Peter ; Lavrutich, Maria ; Nunes, Claudia ; Pimentel, Rita . / Technology Adoption in a Declining Market. Tilburg : CentER, Center for Economic Research, 2018. (CentER Discussion Paper).
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Hagspiel, V, Huisman, K, Kort, P, Lavrutich, M, Nunes, C & Pimentel, R 2018 'Technology Adoption in a Declining Market' CentER Discussion Paper, vol. 2018-021, CentER, Center for Economic Research, Tilburg.

Technology Adoption in a Declining Market. / Hagspiel, V.; Huisman, Kuno; Kort, Peter; Lavrutich, Maria; Nunes, Claudia; Pimentel, Rita .

Tilburg : CentER, Center for Economic Research, 2018. (CentER Discussion Paper; Vol. 2018-021).

Research output: Working paperDiscussion paperOther research output

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Hagspiel V, Huisman K, Kort P, Lavrutich M, Nunes C, Pimentel R. Technology Adoption in a Declining Market. Tilburg: CentER, Center for Economic Research. 2018 Jul 9, (CentER Discussion Paper).