Real Options Analysis for Efficiency of Entry Deterrence with Excess Capacity

This article discusses the competitive behavior of a firm in industry. In the research, the emphasis is put on the behavior of entry deterrence with excess capacity under uncertainty aiming at the efficiency of the entry-deterring strategy against the rival who is holding options to entry. Based on valuing the project of the entrant in the post-entry market, the value of the options to entry and the strategy of the entry affected by the capacity of the incumbent firm are derived using real options analysis. The results of the research show that the contract to the efficiency of the entry-deterring with excess capacity without the rival's decision flexibility involved under the NPV analysis, the same strategy against the potential entrant who is holding options to entry before investment, options to suspend, and options to resume after investment will be inefficient.