The Net Present Value of Investment on Oligopoly Markets

The investment is usually valued by the expected cash flow that is measured by the net present value (NPV). We show that the NPV does not value investment correctly because it does not include the comprehensive impact of investment on the market. Assuming that the investment will change the position of firm on the market we can make a decomposition of the NPV into various effects. The direct (static) effect of the investment is the change in profit compared to the base-case scenario (no investment is made, constant outputs of both investor and competitor). The strategic effect results from changes in output of firms due to transition of the Cournot oligopoly (base-case scenario) to a new equilibrium. The structural effect of the investment measures an impact of the change in the structure of the market.