Mothballing as a Predatory Strategy

Abstract The deregulation of the electricity sector in Europe since the early 1990s led to new challenges. In particular, investors are increasingly exposed to risk and mothballing is an option of increasing interest and regulatory scrutiny. I argue that mothballing can be used to avoid losing the war of attrition of a standard exit game, by decreasing the value of rivals and driving them to quit earlier than if the plant was retired. I describe this phenomenon through the lens of simple game-theoretical settings, and propose a real-options game-theoretic model to describe and quantify the effects of mothballing.