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Vol. 59, No. 1, pp. 16-29 (2008)

“Entry-Deterrent Investment under Uncertainty -Real Options Approach-”
Shinsuke Kamoto (Graduate Student of Economics, Osaka University)

This paper extends a real options model to analyze an entry-deterrent investment decision by an incumbent under uncertainty. The investment timing is endogenously determined with strategic consideration of an incumbent and a potential competitor. The model demonstrates that the incumbent's investment size is larger, its timing will be earlier because the potential competitor attempts to entry the market earlier for fear of entry-deterrence for a longer time and that an increase in uncertainty forces the incumbent to delay its investment decision and reduces the size because the potential competitor waits to entry the market for a longer time.