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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)

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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Bibliographic Info

Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 2002-81.

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

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Web page: http://center.uvt.nl

Related research

Keywords: investment; investment; game theory; uncertainty;

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References

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  1. Dutta Prajit K. & Rustichini Aldo, 1995. "(s, S) Equilibria in Stochastic Games," Journal of Economic Theory, Elsevier, vol. 67(1), pages 1-39, October.
  2. Leahy, John V, 1993. "Investment in Competitive Equilibrium: The Optimality of Myopic Behavior," The Quarterly Journal of Economics, MIT Press, vol. 108(4), pages 1105-33, November.
  3. Weeds, H., 2000. "Strategic Delay in a Real Optimna Model of R&D Competition," The Warwick Economics Research Paper Series (TWERPS) 576, University of Warwick, Department of Economics.
  4. Leo K. Simon., 1987. "Basic Timing Games," Economics Working Papers 8745, University of California at Berkeley.
  5. Grzegorz Pawlina & Peter M. Kort, 2010. "Strategic Quality Choice Under Uncertainty: A Real Options Approach," Manchester School, University of Manchester, vol. 78(1), pages 1-19, 01.
  6. Boyer, Marcel & Lasserre, Pierre & Mariotti, Thomas & Moreaux, Michel, 2004. "Preemption and rent dissipation under price competition," International Journal of Industrial Organization, Elsevier, vol. 22(3), pages 309-328, March.
  7. Kerry Back & Dirk Paulsen, 2009. "Open-Loop Equilibria and Perfect Competition in Option Exercise Games," Review of Financial Studies, Society for Financial Studies, vol. 22(11), pages 4531-4552, November.
  8. Luis Alvarez & Teppo Rakkolainen, 2010. "Investment timing in presence of downside risk: a certainty equivalent characterization," Annals of Finance, Springer, vol. 6(3), pages 317-333, July.
  9. Jan-Henrik Steg, 2012. "Irreversible investment in oligopoly," Finance and Stochastics, Springer, vol. 16(2), pages 207-224, April.
  10. Thijssen, J.J.J. & Huisman, K.J.M. & Kort, P.M., 2001. "Strategic Investment Under Uncertainty and Information Spillovers," Discussion Paper 2001-91, Tilburg University, Center for Economic Research.
  11. Huisman, K.J.M. & Kort, P.M., 1999. "Effects of Strategic Interactions on the Option Value of Waiting," Discussion Paper 1999-92, Tilburg University, Center for Economic Research.
  12. 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, January.
  13. 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.
  14. Steven R. Grenadier, 2002. "Option Exercise Games: An Application to the Equilibrium Investment Strategies of Firms," Review of Financial Studies, Society for Financial Studies, vol. 15(3), pages 691-721.
  15. Pawlina, G. & Kort, P.M., 2001. "Real Options in an Aymmetric Duopoly: Who Benefits from your Competitive Disadvantage," Discussion Paper 2001-95, Tilburg University, Center for Economic Research.
  16. Mason, Robin & Weeds, Helen, 2010. "Investment, uncertainty and pre-emption," International Journal of Industrial Organization, Elsevier, vol. 28(3), pages 278-287, May.
  17. Nielsen, Martin J., 2002. "Competition and irreversible investments," International Journal of Industrial Organization, Elsevier, vol. 20(5), pages 731-743, May.
  18. Huisman, K.J.M., 2000. "Technology Investment: A Game Theoretic Real Options Approach," Open Access publications from Tilburg University urn:nbn:nl:ui:12-84087, Tilburg University.
  19. 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.
  20. Simon, Leo K., 1987. "A Multistage Duel in Continuous Time," Department of Economics, Working Paper Series qt7186g3c4, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  21. Leo K. Simon., 1987. "A Multistage Duel in Continuous Time," Economics Working Papers 8757, University of California at Berkeley.
  22. Simon, Leo K., 1987. "Basic Timing Games," Department of Economics, Working Paper Series qt8kt5h29p, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  23. 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.
  24. Jacco Thijssen, 2010. "Irreversible investment and discounting: an arbitrage pricing approach," Annals of Finance, Springer, vol. 6(3), pages 295-315, July.
  25. Thijssen, Jacco J.J., 2010. "Preemption in a real option game with a first mover advantage and player-specific uncertainty," Journal of Economic Theory, Elsevier, vol. 145(6), pages 2448-2462, November.
  26. Fudenberg, Drew & Tirole, Jean, 1985. "Preemption and Rent Equilization in the Adoption of New Technology," Review of Economic Studies, Wiley Blackwell, vol. 52(3), pages 383-401, July.
  27. repec:fth:tilbur:9992 is not listed on IDEAS
  28. Baldursson, Fridrik M., 1998. "Irreversible investment under uncertainty in oligopoly," Journal of Economic Dynamics and Control, Elsevier, vol. 22(4), pages 627-644, April.
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Citations

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Cited by:
  1. Bouis, Romain & Huisman, Kuno J.M. & Kort, Peter M., 2009. "Investment in oligopoly under uncertainty: The accordion effect," International Journal of Industrial Organization, Elsevier, vol. 27(2), pages 320-331, March.
  2. 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.
  3. 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.
  4. Etienne Billette de Villemeur & Richard Ruble & Bruno Versaevel, 2011. "Coordination and Cooperation in Investment Timing with Externalities?," Working Papers 1128, Groupe d'Analyse et de Théorie Economique (GATE), Centre national de la recherche scientifique (CNRS), Université Lyon 2, Ecole Normale Supérieure.
  5. Michele Moretto, 2003. "Competition and Irreversible Investments under Uncertainty," Working Papers 2003.32, Fondazione Eni Enrico Mattei.
  6. Adrien Nguyen Huu, 2013. "Investment under uncertainty, competition and regulation," Papers 1309.1844, arXiv.org, revised Feb 2014.
  7. Huisman, K.J.M. & Kort, P.M., 2013. "Strategic Capacity Investment Under uncertainty," Discussion Paper 2013-003, Tilburg University, Center for Economic Research.
  8. Adriana Breccia & Héctor Salgado Banda, 2005. "Competing or Colluding in a Stochastic Environment," Working Papers 2005-04, Banco de México.
  9. Adriana Breccia & Hector Salgado-Banda, 2006. "Competing or Colluding in a Stochastic Environment," Computing in Economics and Finance 2006 423, Society for Computational Economics.
  10. Adrien Nguyen Huu, 2013. "Investment under uncertainty, competition and regulation," Working Papers hal-00831263, HAL.
  11. Billette de Villemeur, Etienne & Ruble, Richard & Versaevel, Bruno, 2013. "Investment Timing and Vertical Relationships," MPRA Paper 47804, University Library of Munich, Germany.
  12. Jacco J.J. Thijssen, . "Equilibria in Continuous Time Preemption Games with Markovian Payoffs," Discussion Papers 11/17, Department of Economics, University of York.

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