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Capacity switching options under rivalry and uncertainty

Siddiqui, A; Takashima, R; (2012) Capacity switching options under rivalry and uncertainty. European Journal of Operational Research , 222 (3) pp. 583-595. 10.1016/j.ejor.2012.05.034.

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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. © 2012 Elsevier B.V. All rights reserved.

Type: Article
Title: Capacity switching options under rivalry and uncertainty
DOI: 10.1016/j.ejor.2012.05.034
UCL classification: UCL > School of BEAMS
UCL > School of BEAMS > Faculty of Maths and Physical Sciences
URI: http://discovery.ucl.ac.uk/id/eprint/1347925
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