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Capacity switching options under rivalry and uncertainty

  • Siddiqui, Afzal
  • Takashima, Ryuta
Registered author(s):

    Deregulated 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.

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    Article provided by Elsevier in its journal European Journal of Operational Research.

    Volume (Year): 222 (2012)
    Issue (Month): 3 ()
    Pages: 583-595

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    Handle: RePEc:eee:ejores:v:222:y:2012:i:3:p:583-595
    Contact details of provider: Web page: http://www.elsevier.com/locate/eor

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