A Real-Options Approach to Modeling Investments in Competitive, Dynamic Retail Markets

The proliferation of retail outlets with nearly identical product offerings and similar costs due to market efficiency means that selecting an appropriate market to open a store is a critical decision for a retailer. It is an investment decision that is usually long- term and partially irreversible and can have a significant impact on market share and profitability of a retailer. In this paper, we look at retail market analysis from a theoretical investment perspective to overcome some of the limitations of marketing research. The objective of this paper is to present an integrated investment model that can be used to explore retailers' behaviors in competitive, dynamic markets. By use of this option-based model the impression that the small discount retailer invests earlier in a new developing market is confirmed.