A MODEL OF ENTRY-EXIT DECISIONS AND CAPACITY CHOICE UNDER DEMAND UNCERTAINTY

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dc.creatorIsik, Murat
dc.creatorCoble, Keith H.
dc.creatorHudson, Darren
dc.creatorHouse, Lisa
dc.date2017-04-01T14:58:00Z
dc.date.accessioned2026-07-09T03:29:05Z
dc.descriptionMany investment decisions of agribusiness firms such as when to invest in an emerging market or whether to expand the capacity of the firm involve irreversible investment and uncertainty about demand, cost or competition. This paper uses an option-value model to examine the factors affecting an agribusiness firm's decision whether and how much to invest in an emerging market under demand uncertainty. Demand uncertainty and irreversibility of investment make investment less desirable than the net present value (NPV) rule indicates. The inactive firm is more reluctant to enter the market when it takes into account demand uncertainty because it preserves the opportunity of making a better investment later. The active firm is more reluctant to abandon the investment because there is an option value of keeping the operation alive. There is a greater distance between the entry and exit thresholds under the option-value approach than under the NPV rule due to demand uncertainty. The results have implications for agribusiness decision-making to understand and respond to uncertainty.
dc.identifierdoi:10.22004/ag.econ.19797
dc.identifierhttps://ageconsearch.umn.edu/record/19797/files/sp02is01.pdf
dc.identifierhttp://ageconsearch.umn.edu/record/19797
dc.identifier.urihttp://hdl.handle.net/123456789/533327
dc.languageeng
dc.publisher
dc.sourcehttp://ageconsearch.umn.edu/record/19797
dc.titleA MODEL OF ENTRY-EXIT DECISIONS AND CAPACITY CHOICE UNDER DEMAND UNCERTAINTY
dc.typeText

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