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Capacity switching options under rivalry and uncertainty
Stockholm University, Faculty of Social Sciences, Department of Computer and Systems Sciences.
2012 (English)In: European Journal of Operational Research, ISSN 0377-2217, Vol. 222, no 3, 583-595 p.Article in journal (Refereed) Published
Abstract [en]

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.

Place, publisher, year, edition, pages
2012. Vol. 222, no 3, 583-595 p.
Keyword [en]
Capacity expansion, Decision analysis, Game theory, Investment analysis, Real options
National Category
Economics and Business
URN: urn:nbn:se:su:diva-81278DOI: 10.1016/j.ejor.2012.05.034ISI: 000307144700019OAI: diva2:560522


Available from: 2012-10-15 Created: 2012-10-15 Last updated: 2012-11-19Bibliographically approved

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Siddiqui, Afzal
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