Dynamic models of decision-making processes of technology-driven firms

We model a manufacturer's decision regarding product enhancement and production process improvement. The firm also sets a price on the product which it developed previously but is selling now. Evolving levels of technology affect costs and constrain decisions. The criterion is to maximize the expected present value of the time stream of profits. The results characterize the optimal investment and pricing policies. Our results include sufficient conditions for optima to exhibit monotone decisions concerning enhancement of product design, production process and technology lag between the existing manufacturing technology and the process technology used by the firm for manufacturing. We also examine the tradeoff between expenditure decision between product design and manufacturing process improvement.; Next, we examine the effects of competition on pricing and expenditure decision on product feature enhancement and production process improvement. We study the special case in which the industry consists of a “dominant” firm and a “follower”. We find that there is a Nash equilibrium which shares some features with the monopoly solution, but also differs significantly.; The monopoly model uses lattice programming in order to characterize the optimal policies. To study the effect of competition, we develop new results in lattice programming. These results are also of independent mathematical interest.; We also model entry and exit decisions of firms under uncertainty. The uncertainty in the model is due to shocks specific to the firm. While the initial distribution of uncertainty is exogenous to the firm, the firm updates the uncertainty distribution from its observation of the shock as it matures. We show that there exists a threshold value above which the firm will choose exit the industry. This threshold value is nondecreasing in the mean of the initial prior distribution. We also show that in the absence of entry cost, it is optimal for a firm not to re-enter if it previously chose to exit the industry.