The option value of developing two product standards simultaneously when the final standard is uncertain

Onno Lint () and Enrico Pennings

Vlerick Leuven Gent Management School Working Paper Series from Vlerick Leuven Gent Management School

Abstract: This paper presents a framework for valuing managerial flexibility within the context of product standardization. The framework originates in a major standardization problem concerning digital tape recording at Philips Electronics. We use insights from financial option theory to calculate the option value of simultaneously developing two correlated product standards, and then compare this value to the option value of developing a single standard. We determine a threshold level such that for lower follow-on investment outlays development of both standards is optimal while for higher investment levels development of a single standard is optimal. This threshold is negatively related to the correlation between the value of the two standards. Finally, we show that properly incorporating uncertainty and the interdependence between the payoffs to the two standards leads to significantly different conclusions from standard NPV-analysis.

Pages: 33 pages
Date: 2002-04-22
New Economics Papers: this item is included in nep-rmg
References: Add references at CitEc
Citations:

Downloads: (external link)
http://www.vlerick.be/en/2910-VLK/version/default/ ... vlgms-wp-2002-10.pdf (application/pdf)
Our link check indicates that this URL is bad, the error code is: 404 Not Found (http://www.vlerick.be/en/2910-VLK/version/default/part/AttachmentData/data/vlgms-wp-2002-10.pdf [301 Moved Permanently]--> https://www.vlerick.com/en/2910-VLK/version/default/part/AttachmentData/data/vlgms-wp-2002-10.pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:vlg:vlgwps:2002-10

Access Statistics for this paper

More papers in Vlerick Leuven Gent Management School Working Paper Series from Vlerick Leuven Gent Management School Contact information at EDIRC.
Bibliographic data for series maintained by Isabelle Vandenbroere ().