Optimal timing decisions for the introduction of new technologies

Abstract High technology industries, such as the communications industry, are characterized by frequent development of new technologies. These new technologies are often available before the capacities of existing facilities that use an old technology are exhausted. Whenever a new technology facility is introduced, a fixed set-up cost is generally incurred; however, the annual operating costs are often reduced. The optimal timing of the introduction of new facilities is therefore of interest. In this paper, we examine such timing decisions. The study was motivated by an application involving electronic plug-in units that enhance the operation of communication facilities. First, we develop optimal timing decisions for linearly growing demand. The analysis is then extended to nonlinear demand. For linear demand, one of two decisions is optimal: Either introduce the new technology immediately, or as late as possible. However, for nonlinear demand, these decisions may be nonoptimal.

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