Title
How to escape a declining market : capacity investment or exit?
Author
Faculty/Department
Faculty of Applied Economics
Publication type
article
Publication
Amsterdam ,
Subject
Economics
Mathematics
Source (journal)
European journal of operational research. - Amsterdam
Volume/pages
254(2016) :1 , p. 40-50
ISSN
0377-2217
ISI
000376817100005
Carrier
E
Target language
English (eng)
Full text (Publishers DOI)
Affiliation
University of Antwerp
Abstract
This paper considers a firm that faces a declining profit stream for its established product. The firm has the option to invest in a new technology with which it can produce an innovative product while having the option to exit at any point in time. In the presence of an exit option, earlier work determined the optimal timing to invest, where it was shown that higher uncertainty might accelerate investment timing. In the present paper the firm also decides on capacity. This extension leads to monotonicity, i.e. higher uncertainty delays investment timing. We also find that higher potential profitability of the innovative product market increases the incentive to invest earlier, where, however, we get the counterintuitive result that the firm invests in smaller capacity. Finally, if quantity has a smaller negative effect on price, the firm wants to acquire a larger capacity at a lower investment threshold. (C) 2016 Elsevier B.V. All rights reserved.
E-info
http://gateway.webofknowledge.com/gateway/Gateway.cgi?GWVersion=2&SrcApp=PARTNER_APP&SrcAuth=LinksAMR&KeyUT=WOS:000376817100005&DestLinkType=FullRecord&DestApp=ALL_WOS&UsrCustomerID=ef845e08c439e550330acc77c7d2d848
https://repository.uantwerpen.be/docman/iruaauth/e6e4f3/134190.pdf
Handle