Competition, dedicated assets, and technological obsolescence in multistage infrastructure investments: A sequential compound option valuation

Yu-Lin Huang*, Chia Chi Pi

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

4 Scopus citations

Abstract

Multistage investments are common in area-wide developments of privatized telecommunication networks and other complex infrastructure systems. They represent an incremental strategy that maintains flexibility in managing market risks, funding needs, and resource constraints in geographical expansions. Though compound options can be used to valuate multistage investments, their valuation is complex when the project in question requires upfront and interim investments in dedicated assets for future expansions. The problem becomes more complex when infrastructure markets are competitive and the investment in question is prone to rapid technological progress, which quickly makes the currently best in-use technology obsolete. This paper develops a European sequential compound call option pricing model to valuate multistage investments and analyze how competition, dedicated assets, and technological obsolescence influence the value of flexibility in this incremental strategy.

Original languageEnglish
Article number5475273
Pages (from-to)141-153
Number of pages13
JournalIEEE Transactions on Engineering Management
Volume58
Issue number1
DOIs
StatePublished - 1 Feb 2011

Keywords

  • Dedicated assets
  • multistage investment
  • sequential compound option
  • technological obsolescence
  • valuation

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