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Disruptive Innovation, Market Entry and Production Flexibility in Heterogeneous Oligopoly

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  • Benoît Chevalier‐Roignant
  • Christoph M. Flath
  • Lenos Trigeorgis

Abstract

We develop a model of oligopoly competition involving innovation effort, market entry and production flexibility under demand uncertainty. Several heterogeneous firms make efforts to develop new prototypes; if they succeed, they hold a shared option to enter a new market under stochastic demand. We derive analytic results for the Markov perfect equilibrium accounting for development effort, market entry and production decisions and complement these by numerical analyses. Firm value—which embeds real options—is not convex increasing in demand but exhibits “competitive waves” due to market entries by rivals. A firm with a development advantage (“innovator”) exerts greater innovation effort if the market is a niche, whereas another benefiting from economies of scale (“incumbent”) invests more if the market is larger. Positive externalities benefit the incumbent in the development stage, whereas the innovator is better off in counteracting negative externalities. Demand volatility raises firm incentives to innovate as it enhances the value of firm market‐entry and production flexibility.

Suggested Citation

  • Benoît Chevalier‐Roignant & Christoph M. Flath & Lenos Trigeorgis, 2019. "Disruptive Innovation, Market Entry and Production Flexibility in Heterogeneous Oligopoly," Production and Operations Management, Production and Operations Management Society, vol. 28(7), pages 1641-1657, July.
    • Handle: RePEc:bla:popmgt:v:28:y:2019:i:7:p:1641-1657
    DOI: 10.1111/poms.12995
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    Cited by:

    1. Lavrutich, Maria & Hagspiel, Verena & Siddiqui, Afzal S., 2023. "Transmission investment under uncertainty: Reconciling private and public incentives," European Journal of Operational Research, Elsevier, vol. 304(3), pages 1167-1188.
    2. Balter, Anne G. & Huisman, Kuno J.M. & Kort, Peter M., 2022. "Effects of creative destruction on the size and timing of an investment," International Journal of Production Economics, Elsevier, vol. 252(C).
    3. Dawid, Herbert & Keoula, Michel Y. & Kopel, Michael & Kort, Peter M., 2023. "Dynamic investment strategies and leadership in product innovation," European Journal of Operational Research, Elsevier, vol. 306(1), pages 431-447.
    4. Arne Jeppe & Heike Proff & Max Eickhoff, 2023. "Economic Potentials of Ecologically Attractive Multi-Life Products—The Example of Lithium-Ion Batteries," Sustainability, MDPI, vol. 15(14), pages 1-16, July.
    5. Alain Bensoussan & Benoît Chevalier‐Roignant & Alejandro Rivera, 2022. "A model for wind farm management with option interactions," Production and Operations Management, Production and Operations Management Society, vol. 31(7), pages 2853-2871, July.
    6. Lai, Chun Sing & Locatelli, Giorgio, 2021. "Valuing the option to prototype: A case study with Generation Integrated Energy Storage," Energy, Elsevier, vol. 217(C).
    7. Weihua Liu & Shangsong Long & Yanjie Liang & Jinkun Wang & Shuang Wei, 2023. "The influence of leadership and smart level on the strategy choice of the smart logistics platform: a perspective of collaborative innovation participation," Annals of Operations Research, Springer, vol. 324(1), pages 893-935, May.
    8. Liu, Weihua & Long, Shangsong & Wei, Shuang, 2022. "Correlation mechanism between smart technology and smart supply chain innovation performance: A multi-case study from China's companies with Physical Internet," International Journal of Production Economics, Elsevier, vol. 245(C).
    9. Jun Pei & Ping Yan & Subodha Kumar & Xinbao Liu, 2021. "How to React to Internal and External Sharing in B2C and C2C," Production and Operations Management, Production and Operations Management Society, vol. 30(1), pages 145-170, January.
    10. Wang, Chenxiao & Qureshi, Israr & Guo, Feng & Zhang, Qingpu, 2022. "Corporate social responsibility and disruptive innovation: The moderating effects of environmental turbulence," Journal of Business Research, Elsevier, vol. 139(C), pages 1435-1450.

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