Capacity switching options under rivalry and uncertainty

Afzal Siddiqui and Ryuta Takashima

European Journal of Operational Research, 2012, vol. 222, issue 3, 583-595

Abstract: 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.

Keywords: Capacity expansion; Decision analysis; Game theory; Investment analysis; Real options (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (16)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ejores:v:222:y:2012:i:3:p:583-595

DOI: 10.1016/j.ejor.2012.05.034

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