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ENRICO C. PEROTTI University of Amsterdam; Centre for Economic Policy Research (CEPR) NALIN KULATILAKA Boston University - School of Management |
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Abstract: 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.
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JEL Classifications: G13, G31, D43 |
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Working Paper Series |
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Abstract has been viewed 585 times |
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Go to Download Document Button to download paper from the SSRN Electronic Paper Collection 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 Netherlands +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 NALINK@BU.EDU (Email address for NALIN KULATILAKA ) Boston University - School of Management 595 Commonwealth Avenue Boston , MA 02215 United States 617-353-4603 (Phone) 617-353-6667 (Fax) |
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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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SSRN Electronic Paper Collection
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