When and how should an incumbent respond to a potentially disruptive event?

Benoît Chevalier-Roignant

Journal of Economic Dynamics and Control, 2024, vol. 168, issue C

Abstract: Incumbents can respond to the competitive threat posed by a startup either by external or organic growth. Incumbents may fail do so in due course due to a phenomenon known as “incumbent inertia.” I develop a dynamic model of investment that stresses a new rationale for such inertia. The incumbent may wait even though the option to delay one response is “deep in the money.” This is because the incumbent has to make a choice among several possible responses and is strategically ambivalent about which is best. Such inertia would be bad news for startup valuations if the incumbent delays a lucrative exit for venture capitalists, but good news for consumers if it sustains fiercer competition.

Keywords: Real options; Incumbent inertia; Acquisition; Innovation; Optimal stopping (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:168:y:2024:i:c:s0165188924001660

DOI: 10.1016/j.jedc.2024.104974

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