Sensitivity of Demand Function Choice in a Strategic Real Options Context
نویسندگان
چکیده
This paper studies the effect of the three most commonly used demand functions, i.e. additive, multiplicative and iso-elastic demand, on the investment decisions of two competitive firms. We show that the relative investment decision of the two firms can be very sensitive to the choice of a specific demand function. We find that the use of the multiplicative demand function results in a market where the leader has a bigger capacity than the follower. This is caused by the fixed price intercept of the multiplicative demand model, which implies that there is a fixed market size that has to be shared among the two firms in the market. Because the leader makes its investment decision first, it will be the firm with the largest capacity in the market. The opposite result occurs for the iso-elastic and additive demand model, because these models have no upper bound on demand. Then a follower will delay investment, in order to optimally invest in a large capacity amount. However, the introduction of convex costs violates the previous multiplicative result with linear costs. When the convex costs are sufficiently high, also for this demand function we find that the follower is the firm with the largest capacity. Furthermore, for the iso-elastic demand function, we show that only for a low elasticity parameter the monopoly profit of the leader is large enough that it is optimal to use the deterrence strategy.
منابع مشابه
Optimal Operation of Microgrid in the presence of Real-time Pricing Demand Response Program using Artificial Bee Colony Algorithm with a Modified Choice Function
Abstract: Microgrid is one of the newest technologies in power systems. Microgrid can usually has a set of distributed energy resources that makes it able to operate separate from power grid. Optimal operation of microgrids means the optimal dispatch of power resources through day and night hours. This thesis proposed a new method for optimal operation of microgrid. In this method, real-time pr...
متن کاملValuing flexibility in demand-side response: A real options approach
The investment interests in the electricity industry are transmitted through various mechanisms to other economic activities. This paper considers methods for esteeming the adaptability of demand-side response (DSR) in its capacity to react to future uncertainties. The capacity to evaluate this adaptability is particularly critical for vitality frameworks speculations given their extensive and ...
متن کاملExamining Subsidy Polices on Maize Production in Iran (Panel Data approach)
Among the agricultural important factors, inputs are the most significant in agricultural production. This article aimed to examine the impact of government subsidy policies on production of one of the most strategic products, namely on production of one of the most strategic products, namely maize, in Iran. To achieve this goal, panel data for the nine provinces of Iran's major producers of ma...
متن کاملThe Effect Of Salvage Market On Strategic Technology Choice And Capacity Investment Decision Of Firm Under Demand Uncertainty
متن کامل
The Strategic Value of Flexible Quality Choice: a Real Options Analysis∗
This paper analyzes the value of flexibility in quality choice using a dynamic real-option framework. Firms decide about quality of their products when they enter the market upon incurring a sunk cost. Flexibility in quality choice induces (ceteris paribus) earlier investment, and the value of flexible quality increases with demand uncertainty. We find that a possibility of competitive entry mo...
متن کامل