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

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  • Huberts, N.F.D.
  • Dawid, H.
  • Huisman, K.J.M.
  • Kort, P.M.

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.

Suggested Citation

  • Huberts, N.F.D. & Dawid, H. & Huisman, K.J.M. & Kort, P.M., 2019. "Entry deterrence by timing rather than overinvestment in a strategic real options framework," European Journal of Operational Research, Elsevier, vol. 274(1), pages 165-185.
    • Handle: RePEc:eee:ejores:v:274:y:2019:i:1:p:165-185
    DOI: 10.1016/j.ejor.2018.08.049
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    7. Chuan-Chuan Ko & Chien-Yu Liu & Zan-Yu Chen & Jing Zhou, 2019. "Sustainable Development Economic Strategy Model for Reducing Carbon Emission by Using Real Options Approach," Sustainability, MDPI, vol. 11(19), pages 1-14, October.
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