Real Options With Unknown-Date Events

Arnáiz, Oscar Gutiérrez; Ruiz‐Aliseda, Francisco

doi:10.2139/ssrn.965862

Cited by 4 publications

(4 citation statements)

References 44 publications

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“…Our paper is also related to Gutiérrez and Ruiz-Aliseda (2011). They consider a firm with an option to invest in a product market which grows until a random date and declines thereafter.…”

Section: Introductionmentioning

confidence: 99%

Technological advances and the decision to invest

Flor

Hansen

2012

Ann Finance

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Technological advances impact a firm's investment decision, as they affect the investment cost. They can also affect the profitability due to demand shocks. We study a firm's optimal investment decision when technological advances occur as surprises and induce uncertain reductions in the investment cost and in earnings. Despite this complex setting we derive closed-form solutions for the investment option value and the investment threshold. When technological advances only impact the investment cost, we demonstrate significant contributions compared to existing research, which restricts the analysis by keeping the expected investment cost path constant. For example, we show that, albeit the investment threshold is constant, the option value is very sensitive in the expected impact of technological advances. Leaving the restrictive setting, we obtain more intuitive results, e.g. that more frequent technological advances increase the option value. When technological advances impact future earnings we find important long-term effects: the investment threshold increases, whereas the option value decreases. Finally, earnings volatility postpones investment, while uncertainty due to technological advances expedites investment.

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“…Our paper is also related to Gutiérrez and Ruiz-Aliseda (2011). They consider a firm with an option to invest in a product market which grows until a random date and declines thereafter.…”

Section: Introductionmentioning

confidence: 99%

Technological advances and the decision to invest

Flor

Hansen

2012

Ann Finance

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“…Appendix B in their paper introduces a simple discrete‐time dynamic programming model that focuses on the optimal entry time of a monopolist over the PLC, but they do not endogenize market structure as is done in Amir and Lambson (2007) in a related setting that applies the powerful framework developed by Amir and Lambson (2003). In the last place, our paper builds on the novel Bayesian real options framework introduced by Gutiérrez and Ruiz‐Aliseda (2007), which is simpler than that of Bollen (1999). Its main feature is that demand grows over time until a random maturity date, after which the market gradually disappears.…”

Section: Introductionmentioning

confidence: 99%

“…This framework based on conditional probabilities greatly simplifies an analysis that otherwise would be very complicated in a setup with multiple firms, the focus of this paper 10 . In this sense, the present work is the oligopoly extension of the monopoly analysis in Gutiérrez and Ruiz‐Aliseda (2007).…”

Section: Introductionmentioning

confidence: 99%

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Entry Patterns Over the Product Life Cycle*

Gutiérrez

Ruiz‐Aliseda

2009

The Manchester School

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We study an oligopoly model of entry over the product life cycle based on empirical evidence of demand for a new product growing over time and eventually falling. Yet, we assume that firms do not know ex ante when this can occur, which creates incentives to update information by delaying irreversible entry. Our model distinguishes and explains different patterns of entry characterized by firms entering simultaneously and/or in a sequential fashion, with entry rates accelerating or decelerating under certain conditions related to the rate at which individual profit decreases as more firms enter the industry.

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Strategic Commitment Versus Flexibility in a Duopoly With Entry and Exit

Ruiz‐Aliseda

2006

SSRN Journal

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This paper examines how differences in the opportunity costs of assets employed by firms affect the tradeoff between the commitment to a particular course of action and the flexibility to revise past actions. The setup is characterized by two firms that have to decide at each instant of time whether to be in or out of an industry that is assumed to expand up to a maturity date uncertain to the companies, declining until it disappears thereafter. Firms differ only on the opportunity costs of the resources they possess, and thus their investments are not equally recoverable, which allows for the analysis of whether or not a firm benefits from competing with the assets whose outside option is most valuable. I characterize the path associated to the unique subgame perfect equilibrium of the game and pay special attention to the role of opportunity costs in explaining differences in equilibrium payoffs as well as in entry and exit timing. The analysis provides conditions under which the high-opportunity-cost firm enters first and gains a higher payoff.

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Real Options With Unknown-Date Events

Cited by 4 publications

References 44 publications

Technological advances and the decision to invest

Technological advances and the decision to invest

Entry Patterns Over the Product Life Cycle*

Strategic Commitment Versus Flexibility in a Duopoly With Entry and Exit

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