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Volume flexibility and capacity investment: a real options approach

Xingang Wen (), Peter Kort and Dolf Talman ()
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Xingang Wen: Tilburg University
Dolf Talman: Tilburg University

Journal of the Operational Research Society, 2017, vol. 68, issue 12, 1633-1646

Abstract: Abstract This paper considers the investment decision of a firm where it has to decide about the timing and capacity. We obtain that in a fast-growing market, right after investment the firm produces below capacity, where the utilization rate (the proportion of capacity that is used for production right after the investment) increases with market uncertainty for a very big market trend, and shows no monotonicity for a moderately large market trend. On the other hand, we get that, for a slowly growing or shrinking market, the firm produces up to capacity right after investment. In the intermediate case, the firm produces up to capacity right after investment when uncertainty is low and below capacity when uncertainty is high, whereas the utilization rate decreases with the market uncertainty.

Keywords: investment under uncertainty; monopoly; capacity choice; volume flexibility (search for similar items in EconPapers)
Date: 2017
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Working Paper: Volume Flexibility and Capacity Investment: A Real Options Approach (2015) Downloads
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