On the timing of adoption of multiproduct technologies

Taekwon Kim, Lars‐Hendrik Röller and Mihkel M. Tombak

Naval Research Logistics (NRL), 1994, vol. 41, issue 3, 377-394

Abstract: This article examines a game of multiproduct technology adoption. We consider a duopoly model in which firms choose when to switch from a traditional single‐product technology to a more flexible and more expensive multiproduct technology. The multiproduct technology allows a firm to invade the other firm's market, creating a more competitive environment and reducing profits. We analyze this investment decision as a game of timing using two different equilibrium concepts. First, we utilize the “silent” equilibrium concept, where firms commit at time zero to a switching time. This concept would be applicable to situations where firms cannot observe each other's actions, or when the implementation of the technology requires long lead times and the investment decision is private information. Using this notion we find that both firms adopt the multiproduct technology simultaneously within a certain time interval. We then characterize this time interval in terms of cost and demand conditions. We also derive conditions under which sequential adoption of the multiproduct technology occurs. The second concept used is that of noisy equilibrium, where firms cannot precommit themselves to an adoption time. This concept is appropriate when investment decisions are common knowledge. In this case a firm can credibly threaten to immediately follow suit if the other firm decides to adopt. This threat is sufficient to ensure the collusive outcome where neither firm adopts the flexible technology. © 1994 John Wiley & Sons, Inc.

Date: 1994
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https://doi.org/10.1002/1520-6750(199404)41:33.0.CO;2-2

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