Real options approach for fashionable and perishable products using stock loan with regime switching

Chiu, Chun-Hung; Hou, Shui‐Hung; Li, Xun; Liu, Wei

doi:10.1007/s10479-015-1887-4

Cited by 11 publications

(8 citation statements)

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“…This process relies heavily on research and solving potential issues such as timing, investment, initial capacity, expected profits, and the product life spans (Saravanan and Vikkraman, 2013). In particular, the demand for trendy goods might be unpredictable and can be highly influenced by consumption tendencies and product market circumstances (Chiu et al, 2017). Most companies, such as the ones in manufacturing, frequently faces high demand volatility that comes from volume, product assortment, and customized requirements.…”

Section: Introductionmentioning

confidence: 99%

Real options valuation with duopoly game-theoretic approach and regime switching

Diaz¹

2022

Preprint

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<p>New product demand continuously fluctuates through the life of the product. As a result, markets usually experience high volatility due to fluctuating demand. Hence, organizations must rapidly adapt and be flexible with such volatility. Management decisions cannot rely on traditional models that assume economic variables to be constant over time. Therefore, companies must advance and implement adequate strategies in resource allocation that help them survive in uncertain markets, and mitigate the associated risk from market uncertainty. This research aims to investigate product introduction strategies where two micro-economic theories can be applied: game-theoretic approach and a real options valuation. Specifically, a real options valuation framework with a flexible capacity that can be used to calculate the Net Present Value (NPV) and the optimal initial capacity to invest in a product, which is being introduced in a duopoly environment, is proposed. This framework is based on game theory applied to a duopoly market. A stochastic product life cycle characterized by a regime-switching approach and the consideration of two different game-theoretic models for the cases where competitors have perfect or imperfect information in the market are the main focal points of our study. Subsequently, different numerical examples comparing the results of NPV and optimal initial capacities from both game-theoretic models are presented. It is observed that the leader in the model with perfect information has an important advantage over its opponent because this company makes the first move to establish quantity to supply. Also, the leader in perfect information game has an advantage over the game with imperfect information since decisions with imperfect information have to be made simultaneously, and players need to balance all possible outcomes when making a choice. Consequently, in both models, one of the competitors obtains its maximum NPV when the other invests in the lowest level of capacity. Lastly, expansion and contraction costs play a critical role in the strategy of resource allocation as these costs are involved in capacity flexibility. Therefore, firms can adjust their production when product demand varies to maximize profits.</p>

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Section: Introductionmentioning

confidence: 99%

Real options valuation with duopoly game-theoretic approach and regime switching

Diaz¹

2022

Preprint

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“…Traditionally, airlines increase their revenue by applying complicated revenue management (RM) models and systems. RM in airlines is aimed at effective sales controls and pricing to maximize total revenues for airline tickets, which are perishable products whose values become zero if they are not consumed within a certain time period (Chiu et al, 2017;Feng et al, 2021;Qin et al, 2020). Recently, the de-bundling and re-bundling of service products offered by LCCs have become 'à-lacarte' services and chargeable ancillary services to generate additional revenues.…”

Section: Introductionmentioning

confidence: 99%

Seat assignment problem with the payable up-grade as an ancillary service of airlines

Yoon

Lee

2021

Ann Oper Res

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The de-bundling and re-bundling of service products offered by low cost carriers from service innovation have become 'à-la-carte' services and chargeable ancillary services to generate additional revenues in the airline industry. In this paper, we focus on the payable upgrade option in airlines to increase revenue when customers' demands are uncertain. This study is as an extension of planned upgrade, which guarantees the use of low-quality services at a low price, but requires customers to pay to use upgraded benefits. In this paper, we focus on the seat assignment problem with the payable upgrade option to maximize revenue. Also, we set the condition under which payable upgrade options can generate more revenue. Furthermore, applying Belobaba's EMSR approach, we suggest an effective seat assignment method for multiple fare classes with a payable upgrade option to increase the total revenue. With a simple numerical example, we find that introducing a payable upgrade option can increase the revenue. Our method for allocating seats for multiple fare classes with a payable upgrade option can contribute effectively to revenue increases in airlines' branded fare products, as well as in other service industries.

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“…Fundamental results on regular, singular, and impulse controls of linear regime‐switching diffusion processes have been obtained with verification arguments 30 . Researchers approached specific control problems including but not limited to insurance and finance, 31,32 transportation, 33 resource and energy, 34,35 and environment and ecology 36,37 . The optimality equations are not analytically solvable in general.…”

Section: Introductionmentioning

confidence: 99%

A hybrid stochastic river environmental restoration modeling with discrete and costly observations

Yoshioka

Tsujimura

Hamagami

et al. 2020

Optim Control Appl Methods

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Summary A recent river environmental restoration problem is approached from a standpoint of stochastic control of hybrid regime‐switching diffusion processes with discrete and costly observations. This setting harmonizes with real problems because continuously obtaining environmental and ecological information is difficult, and is often costly. The main problem is to decide when and how much of the sediment should be supplied into a river environment to effectively suppress bloom of benthic algae. The interventions are allowed only at observation times. Finding the optimal river restoration policy ultimately reduces to solving an optimality equation in an unconventional form due to the observation cost and discrete observations. We show its unique solvability and present a connection with degenerate parabolic partial differential equations, with which we can construct an effective algorithm for its approximation. An uncertainty‐averse optimization problem is also considered as an advanced problem. Coefficients and parameter values are identified from experimental and observation results to numerically compute the optimal restoration policy of an existing river environment with and without uncertainty.

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Real options approach for fashionable and perishable products using stock loan with regime switching

Cited by 11 publications

References 50 publications

Real options valuation with duopoly game-theoretic approach and regime switching

Real options valuation with duopoly game-theoretic approach and regime switching

Seat assignment problem with the payable up-grade as an ancillary service of airlines

A hybrid stochastic river environmental restoration modeling with discrete and costly observations

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