Entry and Exit Decisions under Uncertainty
Решения о входе и выходе в условиях неопределённости
1989-06-01
SCID: 54.1/xmqkxxc7
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entry and exit decisionshysteresisrandom walk pricereal optionstrigger prices
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Abstract (AI)
A firm's entry and exit decisions when the output price follows a random walk are examined. An idle firm and an active firm are viewed as assets that are call options on each other. The solution is a pair of trigger prices for entry and exit. The entry trigger exceeds the variable cost plus the interest on the entry cost, and the exit trigger is less than the variable cost minus the interest on the exit cost. These gaps produce "hysteresis." Numerical solutions are obtained for several parameter values; hysteresis is found to be significant even with small sunk costs. Copyright 1989 by University of Chicago Press.
Key Findings
1
An idle firm and an active firm are treated as call options on each other, yielding option-based valuation of entry/exit.
2
Entry and exit decisions are modeled as a pair of trigger prices when output price follows a random walk.
3
Entry trigger price exceeds variable cost plus interest on entry cost, while exit trigger is below variable cost minus interest on exit cost.
4
Numerical solutions show significant hysteresis persists even with small sunk costs across several parameter values.
5
The gaps between entry and exit triggers generate hysteresis in firm behavior.
Research Object
A firm's entry and exit decisions when output price follows a random walk
Research Subject
Trigger (threshold) prices for entry and exit, including the hysteresis gap relative to variable costs and interest on entry/exit costs, and their dependence on sunk costs and stochastic price dynamics
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