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Investment under uncertainty, competition and regulation

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  • Adrien Nguyen Huu

    ()
    (FiME Lab - Laboratoire de Finance des Marchés d'Energie - Université Paris IX - Paris Dauphine - CREST - EDF R&D, IMPA - Instituto Nacional de Matemática Pura e Aplicada - Instituto Nacional de matematica pura e aplicada)

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    Abstract

    We investigate a randomization procedure undertaken in real option games which can serve as a basic model of regulation in a duopoly model of preemptive investment. We recall the rigorous framework of [M. Grasselli, V. Leclère and M. Ludkovsky, Priority Option: the value of being a leader, International Journal of Theoretical and Applied Finance, 16, 2013], and extend it to a random regulator. This model generalizes and unifies the different competitive frameworks proposed in the literature, and creates a new one similar to a Stackelberg leadership. We fully characterize strategic interactions in the several situations following from the parametrization of the regulator. Finally, we study the effect of the coordination game and uncertainty of outcome when agents are risk-averse, providing new intuitions for the standard case.

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    Bibliographic Info

    Paper provided by HAL in its series Working Papers with number hal-00831263.

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    Date of creation: 22 May 2013
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    Handle: RePEc:hal:wpaper:hal-00831263

    Note: View the original document on HAL open archive server: http://hal.archives-ouvertes.fr/hal-00831263
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    Related research

    Keywords: real option game; timing game; regulator; asymmetry; Stackelberg competition; Cournot competition;

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    1. Thijssen, J.J.J. & Huisman, K.J.M. & Kort, P.M., 2002. "Symmetric Equilibrium Strategies in Game Theoretical Real Option Models," Discussion Paper 2002-81, Tilburg University, Center for Economic Research.
    2. Becherer, Dirk, 2003. "Rational hedging and valuation of integrated risks under constant absolute risk aversion," Insurance: Mathematics and Economics, Elsevier, vol. 33(1), pages 1-28, August.
    3. Helen Weeds, 2002. "Strategic Delay in a Real Options Model of R&D Competition," Review of Economic Studies, Oxford University Press, vol. 69(3), pages 729-747.
    4. 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.
    5. 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.
    6. 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.
    7. Chevalier-Roignant, Benoît & Flath, Christoph M. & Huchzermeier, Arnd & Trigeorgis, Lenos, 2011. "Strategic investment under uncertainty: A synthesis," European Journal of Operational Research, Elsevier, vol. 215(3), pages 639-650, December.
    8. Paxson, Dean & Pinto, Helena, 2005. "Rivalry under price and quantity uncertainty," Review of Financial Economics, Elsevier, vol. 14(3-4), pages 209-224.
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