Managerial Economics and Strategy, 2/e

14.4 Investing Under Uncertainty

We now investigate how uncertainty affects investment decisions. In particular, we examine how attitudes toward risk affect willingness to invest and how investors pay to alter their probabilities of success.

In the following examples, the owner of a monopoly decides whether to open a new retail outlet. Because the firm is a monopoly, the return from the investment (the profit from the new store) does not depend on the actions of other firms. As a result, the owner of the monopoly faces no strategic considerations. The owner knows the cost of the investment but is unsure about how many people will patronize the new store; hence, the store’s future profit is uncertain. Because the investment has an uncertain payoff, ...