When should firms choose a risky new technology? An oligopolistic analysis |
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Institution: | 1. Department of Economics, University of Bologna, Piazza Scaravilli 2, Bologna 40126, Italy;2. Department of Economics and Alma Climate Centre, University of Bologna, via San Giacomo 3, Bologna 40126, Italy;3. MEMOTEF, Sapienza University of Rome, Via del Castro Laurenziano 9, Rome 00161, Italy |
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Abstract: | How to choose technology type in a competitive environment is an important and challenging problem, which has received little attention from scholars. To fill this gap, this paper builds a game-theoretic model to examine whether a firm should choose to adopt a risky new technology or to adopt a safe new technology to reduce its marginal cost. I find that the result that each firm should always choose the risky technology in a duopoly may be invalid when more firms enter the market. In this scenario, some firms should adopt the safe technology for relatively high product substitutability because the advantage of employing the risky technology is threatened by the business stealing externality, finally forming heterogeneous equilibria in which both types of technologies are present. Furthermore, I show that the heterogeneous technology choice equilibria are more likely to arise when increasing number of firms enter the market, and that in these equilibria more firms always choose the risky technology than the safe technology. This study conveys relevant economic insights for competitive firms confronted with a dilemma between taking risks in pursuit of greater technology rewards and taking no risks for conservative technology returns. |
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Keywords: | Risk Cost-reduction Oligopoly Technology choice D21 D43 L13 O31 |
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