Strategic investment in information technologies: A real-options and game-theoretic approach

Investments in information technologies constitute more than 50% of all new capital investments by major U.S. companies. Evaluating such investment projects has been recognized as crucial to the efficient allocation of resources. Yet, the existing investment evaluation models are not capable of capturing the characteristics of technology investments due to the difficulty in handling the decision options embedded in such investment opportunities in an uncertain, competitive environment.; Viewing investment projects as real options, this dissertation develops a methodology for evaluating technology investment decisions in the joint presence of uncertainty and competition. It integrates the game-theoretic models of strategic market interactions with real options approach, and provides an improved understanding of the effects of uncertainty and competition on the strategic exercise of real options embedded in technology investments.; Several key features underline the model. First, our study demonstrates how investment strategies depend on competitive interactions. Under the pressure of competition, firms rush to exercise their options early. The resulting "rush equilibrium" substantially erodes the option value of waiting and induces aggressive investment behavior. Second, we derive optimal investment policies and critical investment thresholds. These investment thresholds provide insights into the optimal timing to exercise investment options in a multi-period setting where investment decisions can be deferred but with certain competitive risks. Furthermore, considering different information structures, we extend the conventional full-information models to an asymmetric information context, and demonstrate that asymmetric information leads to sequential patterns of option exercise. Finally, we model price competition and quality differentiation for information products. Our model shows that at equilibrium only a limited number of firms can survive in the markets for information goods. This implies that consolidation will be inevitable in some information product markets such as Internet search engines and the ERP software vendors.; The model generates some new insights into the forces that shape market behavior as observed in the information technology industry. It can be used to determine optimal investment policies for technology innovations and adoptions, multi-stage R & D, new product introduction, and investment projects in information technology infrastructures.