|[A firm could passively observe the standard evolving and being applied] in the industry, and could actively try to lower the risk of expected revenues by preparing for an XML/EDI investment project at a future time.
This deferral option is obtained at no direct cost. Dixit and Pindyck (1994) believe that a company could obtain a deferral option at no cost if it faces no credible competitive threat of loosing the deferred investment opportunity. In the case of monopoly the only cost of deferring is the opportunity cost of delaying the entry. In cases other than monopoly, things are somewhat different. Full benefits of the option, exists for the market leader among two or more competitors. In the case of no market leader, all firms have the option, but only the first mover will enjoy full benefits. [Benaroch and Kauffman (1999) believe that this is the case for duopoly, I would rather extend it to any market structure other than monopoly.]
Dixit, A.K. & Pindyck, R.S. 1994, Investment under Uncertainty, Princeton University Press, Princeton, New Jersey.
|[page 210, left col., 32 ff.]
Yankee could passively observe how the POS debit business evolved in other parts of the country and it could actively try to lower the risk of expected revenues (e.g., lobby for a change in Massachusetts' law).
[page 209, right col., 39 ff.]
Unlike a financial option that is purchased for a cash fee, Yankee obtained its deferral option at no direct cost. Generally, a firm can obtain a deferral option at no cost if it faces no credible competitive threat of losing the deferred investment opportunity (Dixit and Pindyck 1994). This is clearly true in the case of a monopoly. In case of a duopoly, the option exists for the "leader" among two competitors who made
[page 210, left col., 3 ff., 15 ff.]
indirect investments in building up, over time, managerial competencies, reputation, IT infrastructure, etc.; if there is no clear leader, both firms may have the option, but only the first mover would enjoy its full benefits. [...] Hence, as far as project valuation decision-making is concerned, Yankee's only option cost was the opportunity cost of delaying entry-the revenues lost during the deferral period-and a negligible opportunity cost borne by the slim risk of losing the investment opportunity to NYCE (which, counter to expectations, might act earlier than expected).
Dixit, A. K., and Pindyck, R. S. Investment Under Uncertainty, Princeton University Press, Princeton, NJ, 1994.