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Ramsey Waits: A Theory of Non-Exclusive Real Options with First-Mover Advantages

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Jacco Thijssen

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Abstract

This paper analyses the exercise decision of non-exclusive real options in a two-player setting. A general model of non-exclusive real options, allowing the underlying asset to follow any strong Markov process is developed, thus extending the existing literature, which is mainly based on one-dimensional geometric Brownian motion. For games with a first-mover advantage it is proved that an equilibrium with the rent-equalisation property exists. As an example, a duopoly where two firms can adopt a new technology, whose profitability follows a two-dimensional, correlated geometric Brownian motion is studied.

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File URL: http://www.york.ac.uk/depts/econ/documents/dp/0717.pdf
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Paper provided by Department of Economics, University of York in its series Discussion Papers with number 07/17.

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Date of creation: Jun 2007
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Handle: RePEc:yor:yorken:07/17

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Related research
Keywords: Timing games; real options; rent equalisation; technology adoption;

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
O32 - Economic Development, Technological Change, and Growth - - Technological Change - - - Management of Technological Innovation and R&D

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References listed on IDEAS
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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. 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!]
  3. 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)
  4. Jacco Thijssen & Kuno Huisman & Peter Kort, 2006. "The effects of information on strategic investment and welfare," Economic Theory, Springer, vol. 28(2), pages 399-424, 06. [Downloadable!] (restricted)
    Other versions:
  5. 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)
  6. Brennan, Michael J & Schwartz, Eduardo S, 1985. "Evaluating Natural Resource Investments," Journal of Business, University of Chicago Press, vol. 58(2), pages 135-57, April. [Downloadable!] (restricted)
  7. Leo K. Simon., 1987. "Basic Timing Games," Economics Working Papers 8745, University of California at Berkeley.
  8. 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.
    Other versions:
  9. Simon, Leo K & Stinchcombe, Maxwell B, 1989. "Extensive Form Games in Continuous Time: Pure Strategies," Econometrica, Econometric Society, vol. 57(5), pages 1171-1214, September. [Downloadable!] (restricted)
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  10. Pauli Murto, 2004. "Exit in Duopoly Under Uncertainty," RAND Journal of Economics, The RAND Corporation, vol. 35(1), pages 111-127, Spring.
  11. repec:fth:tilbur:9992 is not listed on IDEAS
  12. 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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