Entry Deterrence by Timing Rather than Overinvestment in a Strategic Real Options Framework

43 Pages Posted: 21 Oct 2015

See all articles by Nick F.D. Huberts

Nick F.D. Huberts

Tilburg University

Herbert Dawid

Bielefeld University - Department of Business Administration and Economics; Center for Mathematical Economics

Kuno Huisman

Tilburg University - Department of Econometrics & Operations Research

Peter M. Kort

Tilburg University - Department of Econometrics & Operations Research; Tilburg University - Center for Economic Research (CentER)

Date Written: October 2015

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 capacity size is exogenously given, the investment order changes and the entrant invests before the incumbent does.

Keywords: Incumbent/Entrant, Capacity choice, Investment under Uncertainty, Oligopoly, Real-Option Games

JEL Classification: C73, D92, L13

Suggested Citation

Huberts, Nick F.D. and Dawid, Herbert and Huisman, Kuno and Kort, Peter, Entry Deterrence by Timing Rather than Overinvestment in a Strategic Real Options Framework (October 2015). Bielefeld Working Papers in Economics and Management No. 02-2015. Available at SSRN: https://ssrn.com/abstract=2677096 or http://dx.doi.org/10.2139/ssrn.2677096

Nick F.D. Huberts (Contact Author)

Tilburg University ( email )

P.O. Box 90153
Tilburg, DC 5000 LE
Netherlands

Herbert Dawid

Bielefeld University - Department of Business Administration and Economics ( email )

P.O. Box 100131
D-33501 Bielefeld, NRW 33501
Germany
+49-521-1064843 (Phone)
+49-521-1062994 (Fax)

Center for Mathematical Economics ( email )

Postfach 10 01 31
Bielefeld, D-33501
Germany

Kuno Huisman

Tilburg University - Department of Econometrics & Operations Research ( email )

Tilburg, 5000 LE
Netherlands

Peter Kort

Tilburg University - Department of Econometrics & Operations Research ( email )

Tilburg, 5000 LE
Netherlands
+31 13 466 2062 (Phone)
+31 13 466 3072 (Fax)

HOME PAGE: http://center.uvt.nl/staff/kort/

Tilburg University - Center for Economic Research (CentER) ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands
+31 13 466 2062 (Phone)
+31 13 466 3072 (Fax)

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