INVESTMENT IN TECHNOLOGICAL INNOVATIONS - AN OPTION PRICING APPROACH

This paper develops a model of the optimal investment strategy for a f irm confronted with a sequence of technological innovations. We incorp orate many of the most important characteristics of real-world technol ogy markets. For example, we permit innovations to be stochastic in th eir arrival times and their profitability. We also incorporate learnin g so that firms adopting current innovations become better able to ben efit from future innovations. The model yields four distinct investmen t strategies. The model is then used to predict actual firm policy. Th ese implications are discussed and compared with observed firm behavio r.