Entry deterrence by timing rather than overinvestment in a strategic real options framework

N.F.D. Huberts, Herbert Dawid, Kuno Huisman, Peter Kort

Research output: Contribution to journalArticleScientificpeer-review

Abstract

This paper examines a dynamic incumbent-entrant framework with stochastic evolution of the (inverse) demand, in which both the optimal timing of the investments and the capacity choices are explicitly considered. We find that the incumbent invests earlier than the entrant and that entry deterrence is achieved through timing rather than through overinvestment. This is because the incumbent invests earlier and in a smaller amount compared to a scenario without potential entry. If, on the other hand, the size of the investment is exogenously given, the investment order changes and the entrant invests before the incumbent does.
Original languageEnglish
Pages (from-to)165-185
JournalEuropean Journal of Operational Research
Volume274
Issue number1
DOIs
Publication statusPublished - Apr 2019

Fingerprint

Real Options
Timing
Scenarios
Framework
Real options
Overinvestment
Incumbents
Entry deterrence

Keywords

  • game theory
  • incumbent/entrant
  • capacity choice
  • investment under uncertainty
  • real-option games

Cite this

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Entry deterrence by timing rather than overinvestment in a strategic real options framework. / Huberts, N.F.D.; Dawid, Herbert; Huisman, Kuno; Kort, Peter.

In: European Journal of Operational Research, Vol. 274, No. 1, 04.2019, p. 165-185.

Research output: Contribution to journalArticleScientificpeer-review

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