Time-to-Market Capability as a Stackelberg Growth Option

Time-to-Market Capability as a Stackelberg Growth Option

University of Amsterdam; Centre for Economic Policy Research (CEPR)
Boston University - School of Management

The literature on strategic growth options examines the impact of investment to gain comparative advantages. The commitment of irreversible investment may confer strategic advantages as a result of a reduction in future expansion costs (Dixit, 1980) or operating costs (Kulatilaka and Perotti, 1998); which contain competitors' production strategy and market share. In general, strategic effects have been shown to increase the appeal of early investment. Interestingly, the value of strategic investment may often increase as uncertainty on market demand or cost increases, bacause oligopolistic profits are convex in demand. However, the impact of uncertainty is often ambiguous due to the value of the option to wait.

This paper examines the decision to invest in logistics, market profiling and distribution capabilities that allow a firm to seize market share by being able to deliver a product ahead of competitors under Cournot quantity competition. This has the strategic effect of restraining competitors' behavior, and may justify the early commitment capital even when waiting offers deferment option value due to demand uncertainty. The remarkable result is that the value of such time-to-market investment is unambiguously increasing in such uncertainty. However, when all competitors share this investment opportunity, the resulting "rush to the market" consumes resources without enhancing profitability.

JEL Classifications: G13, G31, D43

Working Paper Series

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Contact Information for ENRICO C. PEROTTI (Contact Author)

E.C.Perotti@uva.nl (Email address for ENRICO C. PEROTTI )
University of Amsterdam
Roetersstraat 18
Finance Group
Amsterdam 1018 WB
+31 20 525 4159 (Phone)
+31 20 525 5285 (Fax)

(No e-mail address available for ENRICO C. PEROTTI )
Centre for Economic Policy Research (CEPR)
90-98 Goswell Road
London EC1V 7RR
United Kingdom

Contact Information for NALIN KULATILAKA

Boston University - School of Management
595 Commonwealth Avenue
Boston , MA 02215
United States
617-353-4603 (Phone)
617-353-6667 (Fax)

Suggested Citation
Perotti, Enrico C. and Kulatilaka, Nalin , "Time-to-Market Capability as a Stackelberg Growth Option" (April 1999). http://ssrn.com/abstract=180809

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