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Symmetric equilibrium strategies in game theoretical real option models

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Author Info
Thijssen, J.J.J.
Huisman, K.J.M.
Kort, P.M. (Tilburg University, Center for Economic Research)

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Abstract

This paper considers the problem of investment timing under uncertainty in a duopoly framework. When both firms want to be the first investor a coordination problem arises. Here, a method is proposed to deal with this coordination problem, involving the use of symmetric mixed strategies. The method is based on Fudenberg and Tirole (1985, Review of Economic Studies), where it was designed within a deterministic framework. The aim of our paper is to extend the applicability of this method to a stochastic environment. The need for this is exemplified by the fact that several recent contributions in multiple firm real option models make unsatisfactory assumptions to solve the coordination problem mentioned above. Moreover, our approach allows us to show that in many cases it is incorrect to claim that "the probability that both firms invest simultaneously, while it is only optimal for one firm to invest, is zero".

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Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 81.

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Date of creation: 2002
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Handle: RePEc:dgr:kubcen:200281

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Find related papers by JEL classification:
C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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  1. Leo K. Simon., 1987. "A Multistage Duel in Continuous Time," Economics Working Papers 8757, University of California at Berkeley.
  2. Hendricks, Ken & Weiss, Andrew & Wilson, Charles A, 1988. "The War of Attrition in Continuous Time with Complete Information," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 29(4), pages 663-80, November. [Downloadable!] (restricted)
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  3. John C. Harsanyi & Reinhard Selten, 1988. "A General Theory of Equilibrium Selection in Games," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262582384.
  4. Huisman, K.J.M. & Kort, P.M., 1999. "Effects of strategic interactions on the option value of waiting," Discussion Paper 92, Tilburg University, Center for Economic Research. [Downloadable!]
  5. Grenadier, Steven R, 1996. " The Strategic Exercise of Options: Development Cascades and Overbuilding in Real Estate Markets," Journal of Finance, American Finance Association, vol. 51(5), pages 1653-79, December. [Downloadable!] (restricted)
  6. Fudenberg, Drew & Tirole, Jean, 1985. "Preemption and Rent Equilization in the Adoption of New Technology," Review of Economic Studies, Blackwell Publishing, vol. 52(3), pages 383-401, July. [Downloadable!] (restricted)
  7. Pawlina, G. & Kort, P.M., 2001. "Real options in an asymmetric duopoly: : who benefits from your competitive disadvantage," Discussion Paper 95, Tilburg University, Center for Economic Research. [Downloadable!]
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  8. Thijssen, J.J.J. & Huisman, K.J.M. & Kort, P.M., 2001. "Strategic investment under uncertainty and information spillovers," Discussion Paper 91, Tilburg University, Center for Economic Research. [Downloadable!]
  9. Leo K. Simon., 1987. "Basic Timing Games," Economics Working Papers 8745, University of California at Berkeley.
  10. Weeds, Helen, 2002. "Strategic Delay in a Real Options Model of R&D Competition," Review of Economic Studies, Blackwell Publishing, vol. 69(3), pages 729-47, July.
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  11. Marcel Boyer & Pierre Lasserre & Thomas Mariotti & Michel Moreaux, 2001. "Real Options, Preemption, and the Dynamics of Industry Investments," Cahiers de recherche du Département des sciences économiques, UQAM 20-10, Université du Québec à Montréal, Département des sciences économiques. [Downloadable!]
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  12. Nielsen, Martin J., 2002. "Competition and irreversible investments," International Journal of Industrial Organization, Elsevier, vol. 20(5), pages 731-743, May. [Downloadable!] (restricted)
  13. repec:fth:tilbur:9992 is not listed on IDEAS
  14. Dutta Prajit K. & Rustichini Aldo, 1995. "(s, S) Equilibria in Stochastic Games," Journal of Economic Theory, Elsevier, vol. 67(1), pages 1-39, October. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. J.J.J. Thijssen & K.J.M. Huisman & P.M. Kort, 2003. "The Effects of Information on Strategic Investment and Welfare," Trinity Economics Papers 200310, Trinity College Dublin, Department of Economics. [Downloadable!]
    Other versions:
  2. Michele Moretto, 2007. "Competition and Irreversible Investments under Uncertainty," "Marco Fanno" Working Papers 0058, Dipartimento di Scienze Economiche "Marco Fanno". [Downloadable!]
  3. Adriana Breccia & Hector Salgado-Banda, 2005. "Competing or Colluding in a Stochastic Framework," Birkbeck Working Papers in Economics and Finance 0504, Birkbeck, Department of Economics, Mathematics & Statistics. [Downloadable!]
  4. Bouis, Romain & Huisman, K.J.M. & Kort, Peter M., 2006. "Investment in oligopoly under uncertainty : the accordion effect," Discussion Paper 69, Tilburg University, Center for Economic Research. [Downloadable!]
    Other versions:
  5. Adriana Breccia & Hector Salgado-Banda, 2006. "Competing or Colluding in a Stochastic Environment," Computing in Economics and Finance 2006 423, Society for Computational Economics. [Downloadable!]
  6. Kort, P.M. & Huisman, K.J.M. & Pawlina, G. & Thijssen, J.J., 2003. "Strategic investment under uncertainty: merging real options with game theory," Discussion Paper 6, Tilburg University, Center for Economic Research. [Downloadable!]
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