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Real Options and Signaling in Strategic Investment Games

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  • Takahiro Watanabe

    (Department of Business Administration, Tokyo Metropolitan University)

Abstract

A 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.

Suggested Citation

  • Takahiro Watanabe, 2012. "Real Options and Signaling in Strategic Investment Games," KIER Working Papers 809, Kyoto University, Institute of Economic Research.
    • Handle: RePEc:kyo:wpaper:809
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    File URL: http://www.kier.kyoto-u.ac.jp/DP/DP809.pdf
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    References listed on IDEAS

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    Cited by:

    1. Qiuqi Wang & Yue Kuen Kwok, 2019. "Signaling game models of equity financing under information asymmetry and finite project life," International Journal of Financial Engineering (IJFE), World Scientific Publishing Co. Pte. Ltd., vol. 6(01), pages 1-38, March.

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    More about this item

    Keywords

    Real Option; Investment Timing; Signaling; Asymmetric Information; Game Theory;
    All these keywords.

    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

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