Volume Flexibility and Capacity Investment: A Real Options Approach

Research output: Working paperDiscussion paperOther research output

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Abstract

This paper considers the investment decision of a firm where it has to decide about the timing and capacity. We obtain that in a fast growing market, right after investment the firm produces below capacity, where the utilization rate (the proportion of capacity that is used for production right after the investment) increases with market uncertainty for a very big market trend, and shows no monotonicity for a moderately large market trend. On the other hand we get that, for a slowly growing or shrinking market, the firm produces up to capacity right after investment. In the intermediate case, the firm produces
up to capacity right after investment when uncertainty is low and below capacity when uncertainty is high, whereas the utilization rate decreases with the market uncertainty.
Original languageEnglish
Place of PublicationTilburg
PublisherEconometrics
Number of pages30
Volume2015-022
Publication statusPublished - 2 Apr 2015

Publication series

NameCentER Discussion Paper
Volume2015-022

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Real options
Volume flexibility
Capacity investment
Uncertainty
Utilization rate
Market uncertainty
Investment decision
Monotonicity
Proportion

Keywords

  • Investment under Uncertainty
  • Monopoly
  • capacity choice
  • volume flexibility

Cite this

Wen, X., Kort, P. M., & Talman, A. J. J. (2015). Volume Flexibility and Capacity Investment: A Real Options Approach. (CentER Discussion Paper; Vol. 2015-022). Tilburg: Econometrics.
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Wen, X, Kort, PM & Talman, AJJ 2015 'Volume Flexibility and Capacity Investment: A Real Options Approach' CentER Discussion Paper, vol. 2015-022, Econometrics, Tilburg.

Volume Flexibility and Capacity Investment : A Real Options Approach. / Wen, X.; Kort, P.M.; Talman, A.J.J.

Tilburg : Econometrics, 2015. (CentER Discussion Paper; Vol. 2015-022).

Research output: Working paperDiscussion paperOther research output

TY - UNPB

T1 - Volume Flexibility and Capacity Investment

T2 - A Real Options Approach

AU - Wen, X.

AU - Kort, P.M.

AU - Talman, A.J.J.

PY - 2015/4/2

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N2 - This paper considers the investment decision of a firm where it has to decide about the timing and capacity. We obtain that in a fast growing market, right after investment the firm produces below capacity, where the utilization rate (the proportion of capacity that is used for production right after the investment) increases with market uncertainty for a very big market trend, and shows no monotonicity for a moderately large market trend. On the other hand we get that, for a slowly growing or shrinking market, the firm produces up to capacity right after investment. In the intermediate case, the firm producesup to capacity right after investment when uncertainty is low and below capacity when uncertainty is high, whereas the utilization rate decreases with the market uncertainty.

AB - This paper considers the investment decision of a firm where it has to decide about the timing and capacity. We obtain that in a fast growing market, right after investment the firm produces below capacity, where the utilization rate (the proportion of capacity that is used for production right after the investment) increases with market uncertainty for a very big market trend, and shows no monotonicity for a moderately large market trend. On the other hand we get that, for a slowly growing or shrinking market, the firm produces up to capacity right after investment. In the intermediate case, the firm producesup to capacity right after investment when uncertainty is low and below capacity when uncertainty is high, whereas the utilization rate decreases with the market uncertainty.

KW - Investment under Uncertainty

KW - Monopoly

KW - capacity choice

KW - volume flexibility

M3 - Discussion paper

VL - 2015-022

T3 - CentER Discussion Paper

BT - Volume Flexibility and Capacity Investment

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Wen X, Kort PM, Talman AJJ. Volume Flexibility and Capacity Investment: A Real Options Approach. Tilburg: Econometrics. 2015 Apr 2. (CentER Discussion Paper).