Abstract
Objective – The purpose of this article is to analyze the impact of preemption (first move advantage, with the consequent emergence of negative externalities to competitors) in situations that consider the optimal moment for investment, in the context of asymmetric oligopolies, and using the options games method. Design/methodology/approach – The developed model was applied to the Brazilian aluminum can industry, in which three firms made up an asymmetric oligopoly, allowing strategic interactions and their consequences on firms’ investment decisions to be analyzed. Findings – In situations of preemption, the results show the relevance of using a dynamic model, allowing us to observe the importance of obtaining a competitive advantage in cost, and showing that it is possible to obtain monopoly profits or take advantage of isolated expansion for a longer period. If this advantage is great, rivals’ threat of preemption can be considered irrelevant, and that the firm will invest in monopolistic time, ignoring the possibility of rivals’ entry. Practical implications – In a competitive environment, firms need to decide whether the best strategy is to invest earlier, acquiring a competitive advantage over their rivals, or to postpone their investments, to acquire more information and mitigate the eventual consequences of market uncertainties. This work shows how to do it. Originality/value – This is the first paper that, by applying real options games, studies the impact of preemption of investment in the oligopolistic asymmetric environment of the Brazilian industry of aluminum cans.
Highlights
The most traditional methodology in capital budgeting is the discounted cash flow (DCF) method – which is analysis of the feasibility of an investment project based on expected future cash flows, and on analysis of its main index, the traditional Net Present Value (NPV)
The developed model was applied to the Brazilian aluminum can industry, in which three firms made up an asymmetric oligopoly, allowing strategic interactions and their consequences on firms’ investment decisions to be analyzed
Monopolistic profits are possibly obtained, or advantages from an isolated expansion may be enjoyed during a greater time period
Summary
The most traditional methodology in capital budgeting is the discounted cash flow (DCF) method – which is analysis of the feasibility of an investment project based on expected future cash flows, and on analysis of its main index, the traditional Net Present Value (NPV). As opposed to the traditional approach, the methodology known as Real Options considers the dynamic nature and the flexibilities involved in decision-making processes This method presumes that investment decisions are made in an individual way, ignoring possible competitive endogenous interactions. When the analysis is applied in a context of imperfect competition, such as is the case in oligopolies, a small number of firms with similar interests interact in such a way that their actions may influence of each other’s profits and individual values In this methodology the effects of competition and opportunity for cooperation are modelled endogenously, the Game Theory fails to explain why firms must have incentives to remain flexible so as to be able to react to market uncertainties.
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