Capacity switching options under rivalry and uncertainty

Siddiqui, Afzal S.; Takashima, Ryuta

doi:10.1016/j.ejor.2012.05.034

Cited by 31 publications

(13 citation statements)

References 26 publications

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“…Additionally, the implications of irreversibility may be further analysed by introdusing agency conflicts as in Löffler [28]. Finally, in line with Siddiqui and Takashima [35], this setup allows for exploration of game-theoretic considerations, e.g., how the presence of a rival impacts the decision to invest and the relative value of the two investment strategies under duopolistic competition.…”

Section: Discussionmentioning

confidence: 95%

Stepwise Investment and Capacity Sizing Under Uncertainty

2015

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The relationship between uncertainty and managerial flexibility is particularly crucial in addressing capital projects. We consider a firm that can invest in a project in either a single (lumpy investment) or multiple stages (stepwise investment) under price uncertainty and has discretion over not only the time of investment but also the size of the project. We confirm that, if the capacity of a project is fixed and the investment premium associated with stepwise investment is positive, then lumpy investment becomes more valuable than a stepwise investment strategy under high price uncertainty. By contrast, if a firm has discretion over capacity, then we show that the stepwise investment strategy always dominates that of lumpy investment. In addition, we show that the total amount of installed capacity under a stepwise investment strategy is always greater than that under lumpy investment.

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Section: Discussionmentioning

confidence: 95%

Stepwise Investment and Capacity Sizing Under Uncertainty

2015

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“…By contrast, Kort et al (2010) show that higher price uncertainty makes a lumpy investment more attractive relative to a stepwise investment strategy by increasing the reluctance to make costly switches between stages, yet show how this result does not hold if a firm has discretion over capacity. Siddiqui and Takashima (2013) extend the symmetric, non-pre-emptive duopoly of Goto et al (2008) by allowing for sequential capacity expansion in order to explore how sequential decision making offsets the effect of competition. While sequential investment is a crucial feature of RE projects, the scope of these papers is limited as they ignore capacity sizing and policy uncertainty.…”

Section: Related Workmentioning

confidence: 99%

Stepwise Green Investment under Policy Uncertainty

Chronopoulos¹,

Hagspiel²,

Fleten³

2016

The Energy Journal

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We analyse how market price and policy uncertainty, in the form of random provision or retraction of a subsidy, interact to affect the optimal time of investment and the size of a renewable energy (RE) project that can be completed in either a single (lumpy investment) or multiple stages (stepwise investment). The subsidy takes the form of a fixed premium on top of the electricity price, and, therefore, investment is subject to electricity price uncertainty. We show that the risk of a permanent retraction (provision) of a subsidy increases (decreases) the incentive to invest, yet lowers (raises) the amount of installed capacity, and that this result is more pronounced as the size of the subsidy increases. Additionally, we show that increasing the number of policy interventions lowers the expected value of a subsidy and the size of the project. Furthermore, we illustrate that, although an increase in the size of a subsidy lowers the relative value of the stepwise investment strategy, the expected value of a lumpy investment strategy is still lower than that of stepwise investment.

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“…Real options models often address the problem of optimal investment timing without considering strategic interactions Siegel, 1985 and1986), while the ones that do, either ignore the sequential nature of investment opportunities (Pawlina & Kort, 2006;Siddiqui & Takashima, 2012) or attitudes towards risk (Huisman & Kort, 2015). In the area of competition, Spatt & Sterbenz (1985) analyse how the degree of rivalry impacts the learning process and the decision to invest, and find that increasing the number of players hastens investment and that the investment decision resembles the standard NPV rule.…”

Section: Related Workmentioning

confidence: 99%

“…Also, Graham (2011) finds that an equilibrium may not exist when allowing for asymmetric information over revenues, Thijssen et al (2012) present an analytical model that deals with the coordination problem in pre-emptive competition, and Siddiqui & Takashima (2012) explore the extent to which sequential decision making offsets the impact of competition. Lavrutich (2017) investigates entry and exit decisions under capacity sizing and duopolistic competition, and finds that the follower can strategically set capacity such that the leader has an incentive to exit.…”

Section: Related Workmentioning

confidence: 99%

Strategic Technology Switching Under Risk Aversion and Uncertainty

Sendstad

Chronopoulos

2017

SSRN Journal

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Sequential investment opportunities or the presence of a rival typically hasten investment under risk neutrality. By contrast, greater price uncertainty or risk aversion increase the incentive to postpone investment in the absence of competition. We analyse how price and technological uncertainty, reflected in the random arrival of innovations, interact with attitudes towards risk to impact both the optimal technology adoption strategy and the optimal investment policy within each strategy, under a proprietary and a non-proprietary duopoly. Results indicate that technological uncertainty increases the follower's investment incentive and delays the entry of the non-proprietary leader, yet it does not affect the proprietary leader's optimal investment policy. Additionally, we show that technological uncertainty decreases the relative loss in the value of the leader due to the follower's entry, while the corresponding impact of risk aversion is ambiguous. Interestingly, we also find that a higher first-mover advantage with respect to a new technology does not affect the leader's entry, and that technological uncertainty may turn a pre-emption game into a war of attrition, where the second-mover gets the higher payoff.

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Capacity switching options under rivalry and uncertainty

Cited by 31 publications

References 26 publications

Stepwise Investment and Capacity Sizing Under Uncertainty

Stepwise Investment and Capacity Sizing Under Uncertainty

Stepwise Green Investment under Policy Uncertainty

Strategic Technology Switching Under Risk Aversion and Uncertainty

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