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A path-dependent contingent-claims approach to capacity investments

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  • Driouchi, Tarik
  • Bennett, David
  • Simpson, Gary

Abstract

This note presents a contingent-claims approach to strategic capacity planning. We develop models for capacity choice and expansion decisions in a single firm environment where investment is irreversible and demand is uncertain. These models illustrate specifically the relevance of path-dependent options analysis to planning capacity investments when the firm adopts demand tracking or average capacity strategies. It is argued that Asian/average type real options can explain hysteresis phenomena in addition to providing superior control of assets in place.

Suggested Citation

  • Driouchi, Tarik & Bennett, David & Simpson, Gary, 2010. "A path-dependent contingent-claims approach to capacity investments," European Journal of Operational Research, Elsevier, vol. 201(1), pages 319-323, February.
    • Handle: RePEc:eee:ejores:v:201:y:2010:i:1:p:319-323
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    8. Xiao, Yi-bin & Fu, Xiaowen & Oum, Tae H. & Yan, Jia, 2017. "Modeling airport capacity choice with real options," Transportation Research Part B: Methodological, Elsevier, vol. 100(C), pages 93-114.
    9. Trigeorgis, Lenos & Tsekrekos, Andrianos E., 2018. "Real Options in Operations Research: A Review," European Journal of Operational Research, Elsevier, vol. 270(1), pages 1-24.

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