Entry Deterrence by Timing Rather than Overinvestment in a Strategic Real Options Framework
43 Pages Posted: 21 Oct 2015
Date Written: October 2015
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: Suggested Citation