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Investment in Electronic Commerce - A Real Options Approach

Author

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  • Bergendahl, Göran

    (Department of Business Administration, School of Economics and Commercial Law, Göteborg University)

Abstract

In recent years substantial investments have been made in eCommerce projects. Some of them seem to have been profitable. In other cases there has not yet been enough demand to generate a cash flow large enough to guarantee a financial viability of the projects. The purpose of this project is to develop a set of methods to be used in order to evaluate investments in eCommerce given an uncertain demand. eCommerce investments are sequential in the meaning that initial “platform” expenditures for web services are to be followed by substantial outlays for marketing. In this paper a real options approach is used for their evaluation. Sales and sales income will be described in terms of a binomial process with declining growth rates. A decision to stop the investments in marketing is assumed to put a cap on that growth. The paper shows that the real options approach is a suitable procedure to evaluate sequential decisions concerning investments in eCommerce. The method is applied on a real case study from a Swedish firm. It is demonstrated that the classical approach of adjusting the discount rate for risk may give quite misleading results.

Suggested Citation

  • Bergendahl, Göran, 2003. "Investment in Electronic Commerce - A Real Options Approach," FE rapport 2003-402, University of Gothenburg, Department of Business Administration.
    • Handle: RePEc:hhb:gunwba:2003_402
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    File URL: http://hdl.handle.net/2077/2621
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    References listed on IDEAS

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    1. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, number 5474.
    2. Michel Benaroch & Robert J. Kauffman, 1999. "A Case for Using Real Options Pricing Analysis to Evaluate Information Technology Project Investments," Information Systems Research, INFORMS, vol. 10(1), pages 70-86, March.
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    Cited by:

    1. Phamthi, Vananh & Ngominh, Trung, 2022. "Disruptive Innovation & Chance for Latecomer Firms in E-Commerce: The Cases of the YES and PINDUODUO," Proceedings of the ENTRENOVA - ENTerprise REsearch InNOVAtion Conference (2022), Hybrid Conference, Opatija, Croatia, in: Proceedings of the ENTRENOVA - ENTerprise REsearch InNOVAtion Conference, Hybrid Conference, Opatija, Croatia, 17-18 June 2022, pages 364-376, IRENET - Society for Advancing Innovation and Research in Economy, Zagreb.

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    More about this item

    Keywords

    eCommerce; sequential investments; flexibility; declining growth rate; real options; case study;
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