Real Options and Signaling in Strategic Investment Games
AbstractA game in which an incumbent and an entrant decide the timings of entries into a new market is investigated. The profit flows involve two uncertain factors: (1) the basic level of the demand of the market observed only by the incumbent and (2) the fluctuation of the profit flow described by a geometric Brownian motion that is common to both firms. The optimal timing for the incumbent, who privately knows the high demand, is earlier than that for the low-demand incumbent. This earlier entrance, however, reveals the information of the high demand to the entrant, so that the entrant observing the timing of the incumbent would accelerate the its own timing of the investment that reduces the monopolistic profit of the incumbent. Therefore, the high-demand incumbent may delay the timing of the investment in order to hide the information strategically. The equilibria of this signaling game are characterized, and the conditions for the manipulative revelation are investigated. The values of both firms are compared with the case of complete information.
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Bibliographic InfoPaper provided by Kyoto University, Institute of Economic Research in its series KIER Working Papers with number 809.
Date of creation: Jan 2012
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More information through EDIRC
Real Option; Investment Timing; Signaling; Asymmetric Information; Game Theory;
Find related papers by JEL classification:
- G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
- C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-01-25 (All new papers)
- NEP-COM-2012-01-25 (Industrial Competition)
- NEP-CTA-2012-01-25 (Contract Theory & Applications)
- NEP-GTH-2012-01-25 (Game Theory)
- NEP-MIC-2012-01-25 (Microeconomics)
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.:
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"Investment timing, agency, and information,"
Journal of Financial Economics,
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