Capacity switching options under rivalry and uncertainty
2012 (English)In: European Journal of Operational Research, ISSN 0377-2217, Vol. 222, no 3, 583-595 p.Article in journal (Refereed) Published
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.
Capacity expansion, Decision analysis, Game theory, Investment analysis, Real options
Economics and Business
IdentifiersURN: urn:nbn:se:su:diva-81278DOI: 10.1016/j.ejor.2012.05.034ISI: 000307144700019OAI: oai:DiVA.org:su-81278DiVA: diva2:560522