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Entry and exit of service providers under cost uncertainty: a real options approach

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  • Wenbo Shi

    (Revenue Management & Analytics, The Walt Disney Company, Orlando, USA)

Abstract

From a real options perspective, this paper examines a service provider's entry and exit decisions toward two types of service outsourcing contracts under service transaction cost uncertainties. Specifically, for a service contract with a flexible duration, the service provider has an option to terminate the contract at any time point by paying a pre-determined exit penalty. For a contract with a fixed-duration, the service provider is obligated to deliver services for a pre-determined period of time. Under this framework, this study seeks to derive the transaction cost conditions that trigger the service provider’s exercise of entry and exit options. Furthermore, via analytical and numerical examinations, this study also uncovers how service transaction cost uncertainty and other business factors (eg, exit penalty and contract duration) influence the service provider’s entry and exit decisions as well as the choice of contract type (ie, fixed-duration versus flexible-duration).

Suggested Citation

  • Wenbo Shi, 2016. "Entry and exit of service providers under cost uncertainty: a real options approach," Journal of the Operational Research Society, Palgrave Macmillan;The OR Society, vol. 67(2), pages 229-239, February.
    • Handle: RePEc:pal:jorsoc:v:67:y:2016:i:2:p:229-239
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    Cited by:

    1. Gao, Yongling & Driouchi, Tarik, 2018. "Accounting for ambiguity and trust in partial outsourcing: A behavioral real options perspective," Journal of Business Research, Elsevier, vol. 92(C), pages 93-104.
    2. Gutiérrez, Óscar, 2020. "On the definition of the investment-uncertainty relationship," Journal of Economics and Business, Elsevier, vol. 112(C).
    3. Awasthy, Prakash & Hazra, Jishnu, 2020. "Collaboration under outcome-based contracts for information technology services," European Journal of Operational Research, Elsevier, vol. 286(1), pages 350-359.
    4. Nunes, Cláudia & Pimentel, Rita, 2017. "Analytical solution for an investment problem under uncertainties with shocks," European Journal of Operational Research, Elsevier, vol. 259(3), pages 1054-1063.
    5. Mahadevan, B. & Hazra, Jishnu & Jain, Tarun, 2017. "Services outsourcing under asymmetric cost information," European Journal of Operational Research, Elsevier, vol. 257(2), pages 456-467.

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