A path-dependent contingent-claims approach to capacity investments

Tarik Driouchi, David Bennett, Gary Simpson

Research output: Contribution to journalArticle

Abstract

This note presents a contingent-claims approach to strategic capacity planning. We develop models for capacity choice and expansion decisions in a single firm environment where investment is irreversible and demand is uncertain. These models illustrate specifically the relevance of path-dependent options analysis to planning capacity investments when the firm adopts demand tracking or average capacity strategies. It is argued that Asian/average type real options can explain hysteresis phenomena in addition to providing superior control of assets in place.
Original languageEnglish
Pages (from-to)319–323
Number of pages5
JournalEuropean Journal of Operational Research
Volume201
Issue number1
DOIs
Publication statusPublished - 16 Feb 2010

Keywords

  • Capacity decisions; Real options; Path-dependent contingent-claims

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