Product Development and Market Expansion: A Real Options Model
We create a model that values complementary and substitute products with potentially correlated revenues, which must be developed sequentially. The model also incorporates the effects of changing market conditions. We find that the value of a combined project increases in correlation, but the probability of investing in the initial product is a decreasing function of correlation. These results are reversed if the products are substitutes. Regardless of the correlation level, higher levels of substitutability reduce the value of the combined projects and increase the probability of investing. Despite greater uncertainty during the phase of limited competition, the firm is more likely to invest early than to postpone investment. Copyright (c) 2007 Financial Management Association International.
If 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.
Volume (Year): 36 (2007)
Issue (Month): 1 (03)
|Contact details of provider:|| Postal: University of South Florida 4202 E. Fowler Ave. COBA #3331, Tampa, FL 33620|
Web page: http://www.blackwellpublishing.com/journal.asp?ref=0046-3892
More information through EDIRC
|Order Information:||Web: http://www.blackwellpublishing.com/subs.asp?ref=0046-3892|
References listed on IDEAS
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.:
- Andrew B. Abel & Avinash K. Dixit & Janice C. Eberly & Robert S. Pindyck, 1995.
"Options, the Value of Capital, and Investment,"
NBER Working Papers
5227, National Bureau of Economic Research, Inc.
- Abel, Andrew B., 1952-, 1995. "Options, the value of capital, and investment," Working papers 3843-95., Massachusetts Institute of Technology (MIT), Sloan School of Management.
- Andrew B. Abel & Avinash K. Dixit & Janice B. Eberly & Robert S. Pindyck, . "Options, the Value of Capital, and Investment," Rodney L. White Center for Financial Research Working Papers 15-95, Wharton School Rodney L. White Center for Financial Research.
- Paul D. Childs & Alexander J. Triantis, 1999. "Dynamic R&D Investment Policies," Management Science, INFORMS, vol. 45(10), pages 1359-1377, October.
- Huisman, K.J.M. & Kort, P.M., 1998.
"Strategic Investment in Technological Innovations,"
1998-114, Tilburg University, Center for Economic Research.
- Childs, Paul D. & Ott, Steven H. & Triantis, Alexander J., 1998. "Capital Budgeting for Interrelated Projects: A Real Options Approach," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 33(03), pages 305-334, September.
- Carr, Peter P, 1988. " The Valuation of Sequential Exchange Opportunities," Journal of Finance, American Finance Association, vol. 43(5), pages 1235-56, December.
- Baldwin, Carliss Y, 1982. " Optimal Sequential Investment When Capital Is Not Readily Reversible," Journal of Finance, American Finance Association, vol. 37(3), pages 763-82, June.
- Kandel, Eugene & Pearson, Neil D., 2002. "Option Value, Uncertainty, and the Investment Decision," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 37(03), pages 341-374, September.
- Margrabe, William, 1978. "The Value of an Option to Exchange One Asset for Another," Journal of Finance, American Finance Association, vol. 33(1), pages 177-86, March.
- Jonathan B. Berk, 2004. "Valuation and Return Dynamics of New Ventures," Review of Financial Studies, Society for Financial Studies, vol. 17(1), pages 1-35.
When requesting a correction, please mention this item's handle: RePEc:bla:finmgt:v:36:y:2007:i:1:p:91-112. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Wiley-Blackwell Digital Licensing)or (Christopher F. Baum)
If references are entirely missing, you can add them using this form.