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Competitive StrategyOptions and Games$
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Benoît Chevalier-Roignant and Lenos Trigeorgis

Print publication date: 2011

Print ISBN-13: 9780262015998

Published to MIT Press Scholarship Online: August 2013

DOI: 10.7551/mitpress/9780262015998.001.0001

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Option to Invest

Option to Invest

Chapter:
(p.219) 7 Option to Invest
Source:
Competitive Strategy
Author(s):

Benoît Chevalier-Roignant

Lenos Trigeorgis

Publisher:
The MIT Press
DOI:10.7551/mitpress/9780262015998.003.0007

This chapter develops a simple framework that lets managers analyze strategic investment and quantify flexibility in a competitive setting in relatively simple terms. It examines the monopolist’s deferral option to identify the main factors influencing the investment policy of a firm. It shows the importance of deriving the trigger strategies as part of the firm’s investment policy under uncertainty. Each firm should select a trigger level for the stochastic demand factor and decide to invest when the actual value of the process exceeds this investment trigger. Due to the existence of strategic interactions in the market, firms cannot simply set a trigger as a monopolist; they have to anticipate whether and when the rival will exercise its investment option in future states. The optimal investment option value reflects firms’ optimal future behavior in interaction with rivals and the resulting equilibrium industry structures.

Keywords:   strategic investment, monopolist, deferral option, investment policy, price competition

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