ANTICIPATED COMPETITIVE ENTRY AND EARLY PREEMPTIVE INVESTMENT IN DEFERRABLE PROJECTS

This article deals with the optimal timing of project initiation in a preemptive competitive environment. Specifically, it illustrates how option pricing can be used to determined whether and when management should exercise a deferrable investment opportunity by making an early investment commitment to preempt anticipated entry by competitors, or whether to wait despite the risk of competitive damage. It is shown that the impact of anticipated competitive arrivals on the value of an investment opportunity in such preemptive situations can be analyzed in a way analogous to known dividends on American call options. An extension to random competitive arrivals is also presented. © 1991.