Heterogeneous goods, strategic investment, and first mover advantages: Real options theory and empirical study

Abstract

This study uses Real Options Analysis to receive information regarding market uncertainty. Traditional studies assume that the market is perfectly competitive and homogeneous. However, the automobile market is imperfectly competitive and its goods are heterogeneous. Automobile firms may obtain first mover advantages through irreversible investment when the market is imperfectly competitive. First mover advantages can be regarded as barriers to entry because followers cannot earn profits by entering the market and raising market share. Moreover, traditional surveys exploited the Generalized Autoregressive Conditional Heteroskedasticity (GARCH) model to estimate the uncertainty (volatility). In this study, the Kalman Filter is adopted for replacing the GARCH model to improve the weaknesses in the traditional estimation method. In this study, the significant level is 0.05, and the adjusted R2 of Toyota and Honda are 0.87 and 0.58.