2279. Capacity expansion investment under financing constraint
Invited abstract in session FA-4: Dynamics of the Firm, stream Continuous and Global Optimization.
Friday, 8:45-10:15Room: H6
Authors (first author is the speaker)
| 1. | Luoyuan Gan
|
| Center for Mathematical Economics & Faculty of Business Administration and Economics, Bielefeld University | |
| 2. | Xingang Wen
|
| Business Administration and Economics, Bielefeld University | |
| 3. | Herbert Dawid
|
| Bielefeld University |
Abstract
This research studies a monopoly firm's timing and size decision to invest in a partially substitute product under demand uncertainty and financing constraint. We assume the investment cost is financed by the instantaneous profit of the old product. Then the financing constraint is binding , in case the investment size is bounded from above. The optimal investment decision balance the revenue effect and cannibalization effect. Although the new product generates additional revenue (revenue effect), it substitutes the old product and reduces revenues from the old product (cannibalization effect). We find that 1) The optimal investment size increases (decreases) with the old product output when the constraint is binding (non-binding). For relatively high levels of demand uncertainty, the optimal investment threshold is U-shaped with respect to the old product output, i.e., a trade-off outcome between the revenue and the cannibalization effects of the new investment that generates additional revenues but reduces revenues of the old product. 2) For a given old product output, the financing constraint is only binding for intermediate levels of demand uncertainty. Otherwise, the constraint is not binding because the optimal investment is either early with small costs (under low uncertainty), or so late that the instantaneous profit from the old product is sufficiently high (under high uncertainty).
Keywords
- Stochastic Models
- Decision Theory and Analysis
- Economic Modeling
Status: accepted
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