Technology acquisition with technological progress: Effects of expectations, rivalry and uncertainty

We study the effect of expectations regarding technological progress on a firm's technology adoption decision in a duopoly. New generation technologies become available, one in each period, with successive generations representing better and better performance. A game theoretic framework is used involving two identical firms competing in the same market over two periods. It is shown that expectations retard adoption of the first period technology. It is also shown that an asymmetric equilibrium results in higher social welfare, and that more investment does not necessarily mean higher levels of welfare. Uncertainty is shown to have either no effect or a negative effect on the adoption of the current technology when Nash equilibrium holds. However, when subgame perfect equilibrium holds, uncertainty has a more complicated effect and numerical examples show that it may even encourage the adoption of the current technology relative to the deterministic equilibrium.