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

Benoit Chevalier-Roignant ()
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Benoit Chevalier-Roignant: EM - EMLyon Business School

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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 between 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: 2024-11
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Published in Journal of Economic Dynamics and Control, 2024, 168, 23 p. ⟨10.1016/j.jedc.2024.104974⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-04770994

DOI: 10.1016/j.jedc.2024.104974

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