Strategic real options: Entry deterrence and exit inducement

The focus of this thesis is the analysis of the strategic behavior of the firms undertaking an irreversible investment decision in an uncertain environment. In particular, this thesis contains three studies, in which we develop continuous-time investment models under uncertainty with lumpy investment. The first two studies analyze firms’ competitive strategies in a setting where they decide not only upon the optimal timing of the investment, but also upon the scale of its installment. In Chapter 2, we examine how hidden competition affects the capacity investment decisions in a duopoly. Chapter 3 extends the strategic investment model with capacity choice by incorporating the exit option. Chapter 4 presents a stochastic dynamic model of predatory pricing under firm-specific uncertainty.