Modelling investment and disinvestment decisions under competition, uncertainty and different market interventions

- A flexible real options market model for investment and disinvestment decisions is developed.
- The model is validated by numerically replicating the optimality property of myopic planning.
- Different market interventions can be integrated and assessed.
- Production ceilings and investment subsidies are preferable to price floors.
- Neglecting disinvestment options can lead to biases in policy impact analyses.

A real options market model is developed, which derives the firms' optimal investment and disinvestment thresholds simultaneously in a competitive environment. It combines genetic algorithms and stochastic simulation, whereby vast modelling flexibility is gained. For example, different market interventions can be integrated and their effects on the firms' investment behaviour and the sectoral welfare can be assessed. The model is validated for its application to competitive markets by numerically replicating the optimality property of myopic planning. According to the results, production ceilings and investment subsidies are preferable to price floors because the welfare is less reduced for a given stimulation of the willingness to invest. Moreover, it is shown that not considering disinvestment options, which in reality often exist, can lead to incorrect valuations of investment strategies at firm level and incorrect policy impact analyses at macroeconomic level.