IDEAS home Printed from https://ideas.repec.org/a/bla/jacrfn/v13y2000i2p99-107.html
   My bibliography  Save this article

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

Author

Listed:
  • 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. Introducing strategic considerations into the real options framework can lead to a rethinking of standard real option analysis. For example, one of‐ten cited conclusion of the real options literature is the overturning of the standard capital budgeting rule of in‐vesting immediately in any project with a positive NPV. Because the fu‐ture value of the asset is uncertain, there may be significant benefits to deferring the investment until condi‐tions prove even more favorable. But this result clearly depends on the lack of competitive access to the project. If firms fear preemption, then the option to wait becomes less valuable. For example, while the standard real op‐tions models suggest that a real estate developer should wait until the devel‐opment option is considerably “in the money,” competition and the fear of preemption will likely force develop‐ers to build much earlier.

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, June.
  • Handle: RePEc:bla:jacrfn:v:13:y:2000:i:2:p:99-107
    DOI: 10.1111/j.1745-6622.2000.tb00057.x
    as

    Download full text from publisher

    File URL: https://doi.org/10.1111/j.1745-6622.2000.tb00057.x
    Download Restriction: no

    References listed on IDEAS

    as
    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.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    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, EPGE Brazilian School of Economics and Finance - FGV EPGE (Brazil).
    9. Hans Haanappel & Han Smit, 2007. "Return distributions of strategic growth options," Annals of Operations Research, Springer, vol. 151(1), pages 57-80, April.
    10. repec:eee:dyncon:v:84:y:2017:i:c:p:1-31 is not listed on IDEAS
    11. repec:kap:revaec:v:30:y:2017:i:4:d:10.1007_s11138-016-0368-6 is not listed on IDEAS
    12. 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.
    13. 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.
    14. 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.
    15. repec:eee:transb:v:123:y:2019:i:c:p:279-322 is not listed on IDEAS
    16. 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.
    17. Kamoto, Shinsuke, 2015. "Strategic capacity expansion under a potential entry threat," International Review of Economics & Finance, Elsevier, vol. 38(C), pages 157-177.
    18. repec:eee:jbfina:v:81:y:2017:i:c:p:181-199 is not listed on IDEAS

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:jacrfn:v:13:y:2000:i:2:p:99-107. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Wiley Content Delivery). General contact details of provider: http://www.blackwellpublishing.com/journal.asp?ref=1078-1196 .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.