Technology competition and optimal investment timing: a real options perspective

Abstract—Companies often choose to defer irreversible invest-ments to maintain valuable managerial flexibility in an uncertain world. For some technology-intensive projects, technology uncer-tainty plays a dominant role in affecting investment timing. This article analyzes the investment timing strategy for a firm that is deciding about whether to adopt one or the other of two incompat-ible and competing technologies. We develop a continuous-time sto-chastic model that aids in the determination of optimal timing for managerial adoption within the framework of real options theory. The model captures the elements of the decision-making process in such a way so as to provide managerial guidance in light of ex-pectations associated with future technology competition. The re-sults of this paper suggest that a technology adopter should defer its investment until one technology’s probability to win out in the marketplace and achieve critical mass reaches a critical threshold