A real options approach to value manufacturing flexibilities with regime-switching product demand

Wahab, M.I.M.; Lee, C. -G.; Sarkar, P.

doi:10.1007/s10696-022-09450-1

Cited by 1 publication

(4 citation statements)

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“…In an early study, Bollen (1999) creates a framework of real-option valuation by considering expansion and contraction in the capacity where the demand is assumed to follow a stochastic PLC represented by a regime-switching lattice in a monopolistic market structure. Similarly, Wahab et al (2023) extend the previous research on manufacturing flexibility for two different types of products that follow growth and decay regimes. They develop a lattice approach to discretize the realization of the correlated demands of both products and value flexible capacity systems using a dynamic programming (DP)-based method.…”

Section: Literature Reviewsupporting

confidence: 75%

“…The first study is by Bollen (1999), which considers a lattice approach to value the investment options under capacity choice considering a product with a two-regime PLC. The second study is by Wahab et al (2023), which develops a real-option valuation framework for two products with correlated demands. They use the lattice approach to discretize the evolution of the correlated demands under two regimes of growth and decay for the two products.…”

Section: Literature Reviewmentioning

confidence: 99%

“…Finally, the PLC is considered to be stochastic and follows a two-regime life cycle behavior. It is intuitive to consider the market behavior and the corresponding demand for products such as hightechnology goods to have both growth and decay regimes, and the market is often initiated with demand growth through marketing activities conducted by companies (Bollen, 1999;Wahab et al, 2023).…”

Section: The Modelmentioning

confidence: 99%

“…In this regard, companies prefer to value future profitability and cash flows by incorporating flexible capacity when there is a large market with potential uncertainty in demand. Several studies extend previous models to multiple demand regimes or products for a more realistic valuation of manufacturing flexibility (Bollen, 1999;Wahab & Lee, 2011;Wahab et al, 2023). In these studies, regimes specifically refer to different cycles over the product's life that are characterized by different fundamentals of demand and not the macroeconomic effects.…”

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confidence: 99%

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Game‐theoretic approaches to product introduction strategies for durable products

Pirayesh Neghab,

Restrepo Diaz,

Cevik

et al. 2024

Manage Decis Econ

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New product demand continuously fluctuates throughout the life of the product. As a result, markets typically experience high volatility. Most companies operate in highly competitive industries where the product volume supplied by the competitors significantly affects production plans. These conditions necessitate companies to be flexible and rapidly adapt to such volatility. In this study, we investigate the product introduction strategies under two microeconomic theories: real‐option valuation and game theory. Specifically, we develop a real‐option valuation framework with a flexible capacity based on two game‐theoretic models, namely, Stackelberg and Cournot, in a duopoly market where competitors have either perfect or imperfect information. Furthermore, we construct a lattice to discretize the demand evolution and adopt a regime‐switching approach to characterize the stochastic product lifetime. We conduct an extensive numerical study and compare net present values (NPVs) and optimal capacities obtained from the game‐theoretic models. Our results show that under perfect information, the Stackelberg competition generates more supply with lower prices and less total than the Cournot competition. Moreover, we find that, compared to the fixed‐capacity system, the flexible capacity system increases the in the Stackelberg game (by 5.5%) more than in the Cournot game (by 3.3%). We provide further results on the performance of the companies based on detailed sensitivity analysis for various model parameters. In particular, we observe that fixed and variable production and installation costs majorly impact capacity allocation decisions and profits.

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Section: Literature Reviewsupporting

confidence: 75%

Section: Literature Reviewmentioning

confidence: 99%

Section: The Modelmentioning

confidence: 99%

mentioning

confidence: 99%

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