Abstract
Information plays a central role in the pricing of financial and real assets and in the process of financial and real innovations. In this spirit, the study of the analogy between the adoption of innovations and the exercise strategy of a stream of embedded options in the presence of incomplete information allows the implementation of option pricing theory to derive the firm's optimal migration strategy under technological uncertainty. The information costs correspond to the expenses in research and development which are experienced by the users and the suppliers of a new technology. This chapter describes the effects of changing different parameters on the options values. The simulations of both analytical formulas regarding the option to upgrade and the optimal technological migration strategy reveal the effects and the role of incomplete information in the computation of option values. These results suggest that future empirical and theoretical studies should distinguish between different technological environments as characterized by information costs and timing.
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