Strategic Decisions of New Technology Adoption under Asymmetric Information: A Game-Theoretic Model

In this paper we explore strategic decision making in new technology adoption by using economic analysis. We show how asymmetric information affects firms’ decisions to adopt the technology. We do so in a two-stage game-theoretic model where the firststage investment results in the acquisition of a new technology that, in the second stage, may give the firm a competitive advantage in the product market. We compare two information structures under which two competing firms have asymmetric information about the future performance (i.e., postadoption costs) of the new technology. We find that equilibrium strategies under asymmetric information are quite different from those under symmetric information. Information asymmetry leads to different incentives and strategic behaviors in the technology adoption game. In contrast to conventional wisdom, our model shows that market uncertainty may actually induce firms to act more aggressively under certain conditions. We also show that having better information is not always a good thing. These results illustrate a key departure from established decision theory. Subject Areas: Asymmetric Information, Information Economics, Strategic Decisions, Technology Adoption, and Technology-Based Competition; Functional Areas: Information Technology, Interorganizational Systems, and Strategic Information Systems; and Methodological Areas: Economic Analysis and Game Theory. ∗We are grateful to Robert Wilson, William Sharpe, Haim Mendelson, Hau Lee, James Sweeney, and Blake Johnson for valuable suggestions on our initial work of this research at Stanford University. We subsequently received constructive comments from Vijay Gurbaxani, Rajeev Tyagi, Sajeev Dewan, Barrie Nault, Robin Keller, Eric Clemons, David Croson, and Tridas Mukhopadhyay, which are greatly appreciated. The first author also wishes to thank seminar participants at Stanford, Wharton, CMU, UCLA, UC Irvine, the INFORMS and the WISE conferences, for valuable comments. The usual disclaimer applies. †Corresponding author.