Article2003

Equilibrium Investment Strategies and Output Price Behavior: A Real-Options Approach

138 citations0/0 files storedReview of Financial Studies

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Capital Investment and Risk Analysis Merger and Competition Analysis Stochastic processes and financial applications

Abstract

The effects of competitive interactions on investment decisions and on the dynamics of the price of a nonstorable commodity are studied in a model of incremental investment with time to build and operating flexibility. I find that an increase in uncertainty may encourage firms to increase their capacity. Furthermore, I show that it may be optimal to invest in additional capacity during periods in which part of the operational capacity is not being utilized. The impact of competition on the properties of the endogenous output price is dramatic. For example, I find that price volatility may be increasing in the number of competitors in the industry.

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References

1994Investment Under Uncertainty.1994Investment under Uncertainty 2007Brownian Motion and Stochastic Calculus 2005Theory of rational option pricing 1982The Value of Waiting to Invest 1976The valuation of options for alternative stochastic processes 1990Irreversibility, Uncertainty, and Investment 1985Evaluating Natural Resource Investments

Cited by

2011Strategic investment under uncertainty: A synthesis 2014Developing real option game models 2006Real options and games: Competition, alliances and other applications of valuation and strategy 2019Capacity investment decisions of two competing ports under uncertainty: A strategic real options approach 2004Real R&D options1 2012A simulation based real options approach for the investment evaluation of nuclear power 2008Investment under uncertainty with price ceilings in oligopolies

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