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Real Options in a Duopoly with Jump Diffusion Prices

Author

Listed:
  • Wei Sun

    (School of Management, Xi’an Jiaotong University, Xi’an City, Shaanxi Province 710049, P. R. China)

  • Yonggan Zhao

    (Rowe School of Business, Halifax, Nova Scotia B3H 4R2, Canada)

  • Leonard MacLean

    (Rowe School of Business, Halifax, Nova Scotia B3H 4R2, Canada)

Abstract

This paper analyzes irreversible investments in technology under asymmetric duopoly. Asset prices are defined by a diffusion with Poisson jumps. Assuming negative externalityfor profit flows, we develop a real options and game theoretic valuation model to evaluate the optimal investment strategies under interaction. Three types of equilibrium, i.e., simultaneous equilibrium, preemptive equilibrium, and sequential equilibrium, are attainable depending on the firms’ competitive advantageand first-mover advantage. The role of a firm, as “leader†, “follower†, or “simultaneous entrant†, is analyzed both exogenously and endogenously. We find that preemptive competition lowers both firms’ profits from the investments in the technology. Numerical examples illustrate the key results.

Suggested Citation

  • Wei Sun & Yonggan Zhao & Leonard MacLean, 2021. "Real Options in a Duopoly with Jump Diffusion Prices," Asia-Pacific Journal of Operational Research (APJOR), World Scientific Publishing Co. Pte. Ltd., vol. 38(06), pages 1-29, December.
    • Handle: RePEc:wsi:apjorx:v:38:y:2021:i:06:n:s0217595921500093
    DOI: 10.1142/S0217595921500093
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    Cited by:

    1. Qing He & Yaqin Liu & Qian Yu & Chao Wei, 2022. "Risk Dominance Analysis of R&D Investment Cooperation in Dynamic Option Game," Sustainability, MDPI, vol. 15(1), pages 1-21, December.

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