Options in technology investment games: The real world TFT-LCD industry case

Liang-Chuan Wu, Shu-Hsing Li, Chorng-Shyong Ong and Chungteh Pan

Technological Forecasting and Social Change, 2012, vol. 79, issue 7, 1241-1253

Abstract: The Thin Film Transistor-Liquid Crystal Display (TFT-LCD) industry has demonstrated that the investment of huge amounts of capital in new plants is a key factor for success. Decisions about investing in the latest generation of plant involve billions of dollars and a great deal of uncertainty. Moreover, the industry shows distinct oligopolistic characteristics, so the first mover's reactions must be considered when making capital decisions in such competitive environments. The traditional net present value (NPV) rule is a ‘now-or-never’ concept that fails to capture the need for managerial flexibility, which is especially important when investments are irreversible and involve a great deal of uncertainty. In this paper, we use a combination of real options and game theory to analyze the investment strategies of a case company in the TFT-LCD industry. The results show that real options reveal the value of flexibility, which NPV fails to consider. In addition, we apply game theory analysis to different investment strategies to demonstrate the decision-making processes used by competing companies.

Keywords: Game theory; Investment analysis; Real options; Risk analysis (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:tefoso:v:79:y:2012:i:7:p:1241-1253

DOI: 10.1016/j.techfore.2012.03.008

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