Adoption Timing of New Equipment with Another Innovation Anticipated

In dynamic environments, decisions about adopting or replacing new equipment or processes are influenced by the expectation of further innovations in technology. This paper examines the issue of the time at which an equipment (vintage one) currently in use is to be replaced with better equipment (vintage two), in the face of uncertain future availability of even better equipment (vintage three). We present an operational model useful in making adoption timing decisions and then present results that offer interesting insights into the impact of uncertainty and output expansion on the adoption time of vintage two. First, we characterize the optimal adoption time of vintage two in terms of the operating costs of various vintages, switching costs between vintages, and the hazard rate for the time of appearance of vintage three. We indicate the conditions under which it is optimal to follow a “now or never” or a “wait and adopt” policy with respect to adoption of vintage two. Second, it is shown that output expansion need not always spur the adoption of innovations. In fact, under certain conditions, output expansion may delay adoption of vintage two, even though vintage two has a higher operating cost savings per unit fixed cost than vintage three. We also provide interesting results on the impact of various costs on the adoption time of vintage two and consider the implications of our results for the supplier of vintages two and three. Finally, we indicate how important factors such as benefits of new technologies other than operating cost reductions, learning effects, changes in costs over time, and fixed operating costs can be incorporated in the model.