Capacity Choice in (Strategic) Real Options Models: A Survey

Nick F.D. Huberts, Kuno J.M. Huisman, Peter M. Kort*, Maria N. Lavrutich

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

Abstract

The theory of real options determines the optimal time to invest in a project of given size. As a main result, it is found that in a more uncertain environment, it is optimal for a firm to delay its investment. In other words, uncertainty generates a “value of waiting.” Recently, contributions appeared that in addition determine the optimal size of the investment. This paper surveys this literature. As a general result, it is obtained that more uncertainty results in larger investments taking place at a later point in time. So, where from the traditional real options literature one can conclude that uncertainty is bad for growth, this is not so clear anymore when also the size of the investment needs to be determined. The survey consists of two parts. First, we present single firm models, and second, we give an overview of the oligopoly models that have appeared up until now.

Original languageEnglish
Pages (from-to)424-439
Number of pages16
JournalDynamic Games and Applications
Volume5
Issue number4
DOIs
Publication statusPublished - Dec 2015

Keywords

  • Capacity investment
  • Competition
  • Real options

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