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Option Exercise Games: The Intersection Of Real Options And Game Theory

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  • Steven R. Grenadier

Abstract

While the real options approach has proven useful in providing an analytical framework for analyzing the timing of investment decisions, a notable failure of the approach has been an almost complete lack of strategic considerations. In standard real options models, invest-ment (and exercise) strategies are for-mulated in isolation, without considering the potential impact of other firms' exercise strategies. This paper illustrates how the intersection of real options and game theory provides powerful new insights into the behavior of economic agents under uncertainty. 2000 Morgan Stanley.

Suggested Citation

  • Steven R. Grenadier, 2000. "Option Exercise Games: The Intersection Of Real Options And Game Theory," Journal of Applied Corporate Finance, Morgan Stanley, vol. 13(2), pages 99-107.
  • Handle: RePEc:bla:jacrfn:v:13:y:2000:i:2:p:99-107
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    File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1745-6622.2000.tb00057.x
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    References listed on IDEAS

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    1. Dutta, Prajit K & Rustichini, Aldo, 1993. "A Theory of Stopping Time Games with Applications to Product Innovations and Asset Sales," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 3(4), pages 743-763, October.
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    Cited by:

    1. Kuno J.M. Huisman & Peter M. Kort, 2015. "Strategic capacity investment under uncertainty," RAND Journal of Economics, RAND Corporation, vol. 46(2), pages 376-408, June.
    2. Wen, Xingang & Hagspiel, V. & Kort, Peter, 2017. "Subsidized Capacity Investment under Uncertainty," Discussion Paper 2017-043, Tilburg University, Center for Economic Research.
    3. Azevedo, Alcino & Paxson, Dean, 2014. "Developing real option game models," European Journal of Operational Research, Elsevier, vol. 237(3), pages 909-920.
    4. repec:dau:papers:123456789/12655 is not listed on IDEAS
    5. Robert Fourt & Gianluca Marcato & Charles Ward, 2007. "Real Option Pricing in Mixed-use Development Projects," Real Estate & Planning Working Papers rep-wp2007-09, Henley Business School, Reading University.
    6. Bajeux-Besnainou, Isabelle & Joshi, Sumit & Vonortas, Nicholas, 2010. "Uncertainty, networks and real options," Journal of Economic Behavior & Organization, Elsevier, vol. 75(3), pages 523-541, September.
    7. Adrien Nguyen Huu, 2013. "Investment under uncertainty, competition and regulation," Papers 1309.1844, arXiv.org, revised Feb 2014.
    8. Flôres Junior, Renato Galvão, 2008. "Are CGE Models still useful in economic policy making?," FGV/EPGE Economics Working Papers (Ensaios Economicos da EPGE) 674, FGV/EPGE - Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil).
    9. repec:eee:dyncon:v:84:y:2017:i:c:p:1-31 is not listed on IDEAS
    10. repec:kap:revaec:v:30:y:2017:i:4:d:10.1007_s11138-016-0368-6 is not listed on IDEAS
    11. Doriana Ruffino & Jonathan Treussard, 2006. "Lumps and Clusters in Duopolistic Investment Games: An Early Exercise Premium Approach," Boston University - Department of Economics - Working Papers Series WP2006-044, Boston University - Department of Economics.
    12. Smit, Han T.J. & Trigeorgis, Lenos, 2006. "Real options and games: Competition, alliances and other applications of valuation and strategy," Review of Financial Economics, Elsevier, vol. 15(2), pages 95-112.
    13. Aabo, Tom & Simkins, Betty J., 2005. "Interaction between real options and financial hedging: Fact or fiction in managerial decision-making," Review of Financial Economics, Elsevier, vol. 14(3-4), pages 353-369.
    14. Kamoto, Shinsuke, 2015. "Strategic capacity expansion under a potential entry threat," International Review of Economics & Finance, Elsevier, vol. 38(C), pages 157-177.
    15. repec:eee:jbfina:v:81:y:2017:i:c:p:181-199 is not listed on IDEAS

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