Two-period duopolistic market entering strategy with penalty cost

Abstract

This study investigates the decision-making behavior with the use of the real options approach on whether to invest in a new market at the current period or wait to invest until the next period. The emphasis of this research is placed on the tradeoffs between the penalty cost of waiting advantage and the entry cost of preemption advantage, and on the construction of a two-period mathematical model and the evaluation of the investment threshold with the goal of maximizing firm value between market entry strategies, under a duopolistic market with the uncertainty of sales volume. Besides the common example of the first-mover advantage, this paper also looks at the waiting advantage of when firms can undertake a price war predicting an economical slowdown. The numerical results show that the investment threshold in the first period increases with increasing market sale volatility, and has a positive relationship with the value of waiting; the investment threshold in the second period decreases with increasing initial second period market share rate, and also has a positive relationship with the value of waiting

Key Words:

• Decision analysis
• investment analysis
• first-mover advantage
• real options
• penalty cost