Investment in Hightech Industries An example from the LCD industry

In this paper we study investments of firms in hightech industries. Typical examples are producers of consumer electronic products such as dvd players, LCD television sets, digital photo cameras, and mobile phones. There are two important characteristics in these markets. The first is (sharply) decreasing sales prices and the second is decreasing production costs. The introduction of new technologies shortens the life cycle of products. Furthermore, innovations in the production process reduce production costs and prices. The latter effect is strengthened by competition. First we develop a standard real options investment model in which the sales price and the unit production costs per unit both follow geometric Brownian motions. However, using real life data from the LCD industry, we show that the sales price can not be described by a geometric Brownian motion. Consequently, a new real options model in discrete time is developed that fits to the real life data. Finally, the two resulting investment strategies of the models are compared. ∗This is work in progress. The most recent version can be downloaded from: http://center.uvt.nl/staff/huisman/hightech.pdf