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Optimal Investment Decisions for Two Positioned Firms Competing in a Duopoly Market with Hidden Competitors

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  • Manuel Rocha Armada
  • Lawrence Kryzanowski
  • Paulo Jorge Pereira

Abstract

This paper extends the literature dealing with the option to invest in a duopoly market for a leader†follower setting. A restrictive assumption embodied in the models in the current literature is that investment opportunities are semi†proprietary in that the two identified or positioned firms are guaranteed to hold at least the follower's position. More competition is realistically captured in our model by introducing the concept of hidden rivals so that the places in the market can be taken not only by positioned firm but also by these hidden competitors. The value functions and the optimal triggers for the positioned firms differ materially in settings with(out) the presence of hidden rivals. Unlike existing models, our model allows for (a)symmetric market shares and investment costs for the leader and the follower. Cooperative entrance by the two positioned firms is also modelled.

Suggested Citation

  • Manuel Rocha Armada & Lawrence Kryzanowski & Paulo Jorge Pereira, 2011. "Optimal Investment Decisions for Two Positioned Firms Competing in a Duopoly Market with Hidden Competitors," European Financial Management, European Financial Management Association, vol. 17(2), pages 305-330, March.
    • Handle: RePEc:bla:eufman:v:17:y:2011:i:2:p:305-330
    DOI: 10.1111/j.1468-036X.2009.00514.x
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    References listed on IDEAS

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    Cited by:

    1. Morreale, Azzurra & Mittone, Luigi & Lo Nigro, Giovanna, 2019. "Risky choices in strategic environments: An experimental investigation of a real options game," European Journal of Operational Research, Elsevier, vol. 279(1), pages 143-158.
    2. Pereira, Paulo J. & Rodrigues, Artur, 2019. "Investing in a random start American option under competition," Finance Research Letters, Elsevier, vol. 28(C), pages 388-397.
    3. Sendstad, Lars Hegnes & Chronopoulos, Michail, 2017. "Strategic Technology Switching under Risk Aversion and Uncertainty," Discussion Papers 2017/10, Norwegian School of Economics, Department of Business and Management Science.
    4. Pereira, Paulo J. & Armada, Manuel Rocha, 2013. "Investment decisions under hidden competition," Economics Letters, Elsevier, vol. 121(2), pages 228-231.
    5. Rau, Philipp & Spinler, Stefan, 2016. "Investment into container shipping capacity: A real options approach in oligopolistic competition," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 93(C), pages 130-147.
    6. Michi Nishihara, 2018. "Valuation of an R&D project with three types of uncertainty," EURO Journal on Decision Processes, Springer;EURO - The Association of European Operational Research Societies, vol. 6(1), pages 93-113, June.
    7. Michi Nishihara, 2017. "Valuation of an R&D project with three types of uncertainty," Discussion Papers in Economics and Business 17-15, Osaka University, Graduate School of Economics.
    8. Nick Huberts & Kuno Huisman & Peter Kort & Maria Lavrutich, 2015. "Capacity Choice in (Strategic) Real Options Models: A Survey," Dynamic Games and Applications, Springer, vol. 5(4), pages 424-439, December.
    9. Lavrutich, Maria N. & Huisman, Kuno J.M. & Kort, Peter M., 2016. "Entry deterrence and hidden competition," Journal of Economic Dynamics and Control, Elsevier, vol. 69(C), pages 409-435.
    10. Sendstad, Lars Hegnes & Chronopoulos, Michail, 2021. "Strategic technology switching under risk aversion and uncertainty," Journal of Economic Dynamics and Control, Elsevier, vol. 126(C).
    11. Roger Adkins & Dean Paxson, 2014. "Stochastic Equipment Capital Budgeting with Technological Progress," European Financial Management, European Financial Management Association, vol. 20(5), pages 1031-1049, November.

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