Verena Hagspiel

Optimal technology adoption when the arrival rate of new technologies changes

Our paper contributes to the literature of technology adoption. In most of these models it is assumed that the intensity rate of new arrivals is constant. We extend this approach by assuming that after the last technology jump the intensity of a new arrival can change. Right after the arrival of a new technology the intensity equals a specific value that switches if no new technology arrival has taken place within a certain period after the last technology arrival. We look at different scenarios, dependent on whether the firm is threatened by a drop in the arrival rate after a certain time period or expects the rate to rise. We analyze the effect of a mean preserving spread of the time between two consecutive arrivals on the optimal investment timing and show that larger variance can accelerate investment in case the arrival rate rises while it can decelerate investment in case the arrival rate drops. We find that firms often adopt a new technology a time lag after its introduction, which is a phenomenon frequently observed in practice. Regarding a firm’s technology releasing strategy we explain why additional uncertainty can stimulate customers’ buying behavior. The optimal adoption timing changes significantly, depending on whether the arrival rate is assumed to change or be constant over time. Adding uncertainty about the length of the time period after which the arrival intensity changes, we find that increasing uncertainty accelerates investment, a result that is opposite to the standard real options theory.

Stepwise Investment and Capacity Sizing Under Uncertainty

The relationship between uncertainty and managerial flexibility is particularly crucial in addressing capital projects. We consider a firm that can invest in a project in either a single (lumpy investment) or multiple stages (stepwise investment) under price uncertainty and has discretion over not only the time of investment but also the size of the project. We confirm that if the capacity of a project is fixed and the investment premium associated with stepwise investment is positive, then lumpy investment becomes more valuable than a stepwise investment strategy under high price uncertainty. By contrast, if a firm has discretion over capacity, then we show that the stepwise investment strategy always dominates that of lumpy investment. In addition, we show that the total amount of installed capacity under a stepwise investment strategy is always greater than that under lumpy investment.

Investment in electric energy storage under uncertainty: a real options approach

In this paper we develop a real options approach to evaluate the profitability of investing in a battery bank. The approach determines the optimal investment timing under conditions of uncertain future revenues and investment cost. It includes time arbitrage of the spot price and profits by providing ancillary services. Current studies of battery banks are limited, because they do not consider the uncertainty and the possibility of operating in both markets at the same time. We confirm previous research in the sense that when a battery bank participates in the spot market alone, the revenues are not sufficient to cover the initial investment cost. However, under the condition that the battery bank also can receive revenues from the balancing market, both the net present value (NPV) and the real options value are positive. The real options value is higher than the NPV, confirming the value of flexible investment timing when both revenues and investment cost are uncertain.

How to escape a declining market: Capacity investment or Exit? ☆

This paper considers a firm that faces a declining profit stream for its established product. The firm has the option to invest in a new technology with which it can produce an innovative product while having the option to exit at any point in time. In the presence of an exit option, earlier work determined the optimal timing to invest, where it was shown that higher uncertainty might accelerate investment timing. In the present paper the firm also decides on capacity. This extension leads to monotonicity, i.e. higher uncertainty delays investment timing. We also find that higher potential profitability of the innovative product market increases the incentive to invest earlier, where, however, we get the counterintuitive result that the firm invests in smaller capacity. Finally, if quantity has a smaller negative effect on price, the firm wants to acquire a larger capacity at a lower investment threshold.

Switching from Oil to Gas Production in a Depleting Field

Abstract We derive an optimal decision rule with regards to making an irreversible switch from oil to gas production. The approach can be used by petroleum field operators to maximize the value creation from a petroleum field with diminishing oil production and remaining gas reserves. Assuming that both the oil and gas prices follow a geometric Brownian motion we derive an analytical solution for the exercise threshold. We also propose an explicit solution for the option value that is new to the literature. Numerical examples are used to demonstrate the threshold and option value for a generic petroleum field. Both the threshold and option value solutions are relevant for application to other real options cases with similar features (e.g. other types of switching options or a perpetual spread option).

Subsidized Capacity Investment under Uncertainty

This paper studies how the subsidy support, e.g. price support and reimbursed investment cost support, affects the investment decision of a monopoly firm under uncertainty and analyzes the implications for social welfare. The analytical results show that the unconditional, i.e., subsidy support that is introduced from the beginning, makes the firm invest earlier. Under a linear demand structure, the unconditional subsidy cannot align the firms investment decision to the social optimal one. However, a conditional subsidy, i.e., subsidy support introduced at the social optimal investment threshold, can align the two decisions. For a non-linear demand structure, it is possible for the unconditional subsidy to make the firm invest according to the social optimum. When the investment decisions are aligned, the firms investment leads to the first-best outcome.