How to escape a declining market: Capacity investment or exit?
Hagspiel,Verena Huisman,Kuno Kort,Peter Nunes,Claudia
Hagspiel,Verena
Huisman,Kuno
Kort,Peter
Nunes,Claudia
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.
Description
Date
2016
Journal Title
Journal ISSN
Volume Title
Publisher
Research Projects
Organizational Units
Journal Issue
Keywords
investment analysis, exit, capacity investment, declining market, real options
Citation
Hagspiel, V, Huisman, K, Kort, P & Nunes, C 2016, 'How to escape a declining market : Capacity investment or exit?', European Journal of Operational Research, vol. 254, no. 1, pp. 40-50. https://doi.org/10.1016/j.ejor.2016.04.009