Capacity switching options under rivalry and uncertainty
AbstractDeregulated infrastructure industries exhibit stiff competition for market share. Firms may be able to limit the effects of competition by launching new projects in stages. Using a two-stage real options model, we explore the value of such flexibility. We first demonstrate that the value of investing in a sequential manner for a monopolist is positive but decreases with uncertainty. Next, we find that a typical duopoly firm’s value relative to a monopolist’s decreases with uncertainty as long as the loss in market share is high. Intriguingly, this result is reversed for a low loss in market share. We finally show that this loss in value is reduced if a firm invests in a sequential manner and specify the conditions under which sequential capacity expansion is more valuable for a duopolist firm than for a monopolist.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Bibliographic InfoArticle provided by Elsevier in its journal European Journal of Operational Research.
Volume (Year): 222 (2012)
Issue (Month): 3 ()
Contact details of provider:
Web page: http://www.elsevier.com/locate/eor
Capacity expansion; Decision analysis; Game theory; Investment analysis; Real options;
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- repec:fth:tilbur:9992 is not listed on IDEAS
- Kort, Peter M. & Murto, Pauli & Pawlina, Grzegorz, 2010. "Uncertainty and stepwise investment," European Journal of Operational Research, Elsevier, vol. 202(1), pages 196-203, April.
- Pindyck, Robert S, 1988.
"Irreversible Investment, Capacity Choice, and the Value of the Firm,"
American Economic Review,
American Economic Association, vol. 78(5), pages 969-85, December.
- Pindyck, Robert S., 1986. "Irreversible investment, capacity choice, and the value of the firm," Working papers 1802-86., Massachusetts Institute of Technology (MIT), Sloan School of Management.
- Robert S. Pindyck, 1986. "Irreversible Investment, Capacity Choice, and the Value of the Firm," NBER Working Papers 1980, National Bureau of Economic Research, Inc.
- Jean-Paul Décamps & Thomas Mariotti & Stéphane Villeneuve, 2006.
"Irreversible investment in alternative projects,"
Springer, vol. 28(2), pages 425-448, 06.
- Dangl, Thomas, 1999. "Investment and capacity choice under uncertain demand," European Journal of Operational Research, Elsevier, vol. 117(3), pages 415-428, September.
- Grenadier, Steven R, 1996. " The Strategic Exercise of Options: Development Cascades and Overbuilding in Real Estate Markets," Journal of Finance, American Finance Association, vol. 51(5), pages 1653-79, December.
- Siddiqui, Afzal S. & Maribu, Karl, 2009. "Investment and upgrade in distributed generation under uncertainty," Energy Economics, Elsevier, vol. 31(1), pages 25-37, January.
- Paxson, Dean & Pinto, Helena, 2005. "Rivalry under price and quantity uncertainty," Review of Financial Economics, Elsevier, vol. 14(3-4), pages 209-224.
- Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-54, May-June.
- Bouis, R. & Huisman, K.J.M. & Kort, P.M., 2006.
"Investment in Oligopoly under Uncertainty: The Accordion Effect,"
2006-69, Tilburg University, Center for Economic Research.
- Bouis, Romain & Huisman, Kuno J.M. & Kort, Peter M., 2009. "Investment in oligopoly under uncertainty: The accordion effect," International Journal of Industrial Organization, Elsevier, vol. 27(2), pages 320-331, March.
- Kong, Jean J. & Kwok, Yue Kuen, 2007. "Real options in strategic investment games between two asymmetric firms," European Journal of Operational Research, Elsevier, vol. 181(2), pages 967-985, September.
- Bar-Ilan, Avner & Strange, William C, 1996. "Investment Lags," American Economic Review, American Economic Association, vol. 86(3), pages 610-22, June.
- Shibata, Takashi & Yamazaki, Hiroshi, 2010. "Strategic investment timing under asymmetric access charge regulation in telecommunications," European Journal of Operational Research, Elsevier, vol. 207(3), pages 1689-1701, December.
- Mason, Robin & Weeds, Helen, 2010. "Investment, uncertainty and pre-emption," International Journal of Industrial Organization, Elsevier, vol. 28(3), pages 278-287, May.
- Huisman, K.J.M. & Kort, P.M., 2004.
"Strategic technology adoption taking into account future technological improvements: A real options approach,"
Open Access publications from Tilburg University
urn:nbn:nl:ui:12-140879, Tilburg University.
- Huisman, Kuno J. M. & Kort, Peter M., 2004. "Strategic technology adoption taking into account future technological improvements: A real options approach," European Journal of Operational Research, Elsevier, vol. 159(3), pages 705-728, December.
- Huisman, K.J.M. & Kort, P.M., 2000. "Strategic Technology Adoptation Taking into Account Future Technological Improvements: A Real Options Approach," Discussion Paper 2000-52, Tilburg University, Center for Economic Research.
- Takashima, Ryuta & Goto, Makoto & Kimura, Hiroshi & Madarame, Haruki, 2008. "Entry into the electricity market: Uncertainty, competition, and mothballing options," Energy Economics, Elsevier, vol. 30(4), pages 1809-1830, July.
- Chevalier-Roignant, Benoît & Flath, Christoph M. & Huchzermeier, Arnd & Trigeorgis, Lenos, 2011. "Strategic investment under uncertainty: A synthesis," European Journal of Operational Research, Elsevier, vol. 215(3), pages 639-650, December.
- Saman Majd & Robert S. Pindyck, 1987.
"Time to Build, Option Value, and Investment Decisions,"
NBER Working Papers
1654, National Bureau of Economic Research, Inc.
- Majd, Saman & Pindyck, Robert S., 1987. "Time to build, option value, and investment decisions," Journal of Financial Economics, Elsevier, vol. 18(1), pages 7-27, March.
- Gollier, Christian & Proult, David & Thais, Francoise & Walgenwitz, Gilles, 2005.
"Choice of nuclear power investments under price uncertainty: Valuing modularity,"
Elsevier, vol. 27(4), pages 667-685, July.
- Gollier, Christian & Proult, David & Thais, Françoise & Walgenwitz, Gilles, 2004. "Choice of Nuclear Power Investments ander Price Uncertainty: Valuing Modularity," IDEI Working Papers 270, Institut d'Économie Industrielle (IDEI), Toulouse.
- Gollier, Christian, 2004. "Choice of Nuclear Power Investments under Price Uncertainty: Valuing Modularity," IDEI Working Papers 287, Institut d'Économie Industrielle (IDEI), Toulouse.
- Robert Wilson, 2002. "Architecture of Power Markets," Econometrica, Econometric Society, vol. 70(4), pages 1299-1340, July.
- Huisman, K.J.M. & Kort, P.M., 1999. "Effects of Strategic Interactions on the Option Value of Waiting," Discussion Paper 1999-92, Tilburg University, Center for Economic Research.
- Sangtaek Seo & Eduardo Segarra & Paul D. Mitchell & David J. Leatham, 2008. "Irrigation technology adoption and its implication for water conservation in the Texas High Plains: a real options approach," Agricultural Economics, International Association of Agricultural Economists, vol. 38(1), pages 47-55, 01.
- McDonald, Robert L & Siegel, Daniel R, 1985. "Investment and the Valuation of Firms When There Is an Option to Shut Down," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 26(2), pages 331-49, June.
- Brennan, Michael J & Schwartz, Eduardo S, 1985. "Evaluating Natural Resource Investments," The Journal of Business, University of Chicago Press, vol. 58(2), pages 135-57, April.
- Dixit, Avinash, 1993. "Choosing among alternative discrete investment projects under uncertainty," Economics Letters, Elsevier, vol. 41(3), pages 265-268.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.