Strategic Investment Timing Under Profit Complementarites

This paper analyses strategic investment games between two firms that compete for the adoption of a new more efficient technology whose returns are uncertain. We assume that once one of the two firms adopted the new technology, joint adoption is preferable for both firms, that is there are positive profit complementarities in the product market. There are, moreover, externalities derivig from the first firm’s investment. By modelling the switch from a well established technology to a new one as a dynamic stochastic game, we fully characterize the equilibria of the game under both non-cooperative and cooperative firms’ behaviour. We show that in the cooperative equilibrium firms will invest later under negative externalities and earlier under positive externalities. Thus we identify circumstances in which competiton can be suboptimal (too much waiting). Overall, compared to earlier models that only allow for a new market game, our model examines a richer set of strategic interactions of adoption decisions.