Get Out or Get Down : Rival Options in a Declining Market

We formulate a multi-factor real option duopoly game model to determine the optimal times to divest the incumbent technology or to switch to a new smaller-scale and lower operating cost technology, with an uncertain output price, and declining output. The formulation takes two alternative forms: (i) the divest and switch options are treated separately (separate) and (ii) the two options are mutually-exclusive (joint). Although the first-mover has a salvage value advantage, the second-mover has a temporary market share advantage. The alternative forms yield significantly different outcomes: the thresholds are all lower under the separate formulation, and hysteresis is greater. Conventional separate thresholds are sometimes 2/3’s of the thresholds indicated by net present values, but joint thresholds 3/4’s of conventional separate real option thresholds. When getting out (divest) or getting down, watch the competition and sometimes consider the options jointly. Analysts should note that the total firm values including the divestment and switching options are a multiple of the net operating present values, which are significantly different according to rival actions