Investment Decisions in Granted Monopolies Under the Threat of a Random Demonopolization

This paper studies the demonopolization process of granted monopolies. A demonopolization process may have different origins such as changes in the policy of a government or a regulator, or new invention or innovation competing with existing patented ones. The demonopolization of the market represents a threat for the granted monopolist and is a relevant source of risk. In the existing real options literature, the market structure is assumed to be steady state, not allowed to change. In the current paper, this assumption is relaxed. Here a monopolistic firm faces the threat of demonopolization, that changes the market structure to a duopoly market. This threat is treated as a random source of uncertainty and represents an additional risk both for a granted monopolistic operating firm, and for a company having a granted monopolistic option to invest. ∗Corresponding author. Faculdade de Economia da Universidade do Porto. Rua Dr. Roberto Frias, 4200-464 Porto (Portugal). E-mail: [email protected]. Phone: +351 225 571 225. Fax: +351 225 505 050. Investment Decisions in Granted Monopolies Under the Threat of a Random Demonopolization