Monopoly with timing and scaling options
We develop a model of the investment behavior of a firm that faces a stochastic, downward-sloping demand curve. The firm’s challenge is to determine the optimal scale and time of an investment, so there is a potential for market power in the sense of markup pricing along two dimensions: static market power along a quantity dimension, and dynamic market power along a time dimension. Depending on the specific assumptions, either dimension will be more or less relevant. For example, the option to wait may be useless if the uncertainty of demand is low and the demand curve is not very elastic. Then the decision of the firm simplifies to that of a standard monopoly model. In other cases, the option to wait prevails. Typically, the latter happens when there is much uncertainty and the demand curve is fairly elastic. The formal model is illustrated by decisions in the real estate industry.
Publisert i Fagkonferanse i bedriftsøkonomiske emner (FIBE) 2002, 2002
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