Lumps and Clusters in Duopolistic Investment Games: An Early Exercise Premium Approach
This paper exploits the early exercise premium representation to investigate strate- gic investment policies in a duopolistic continuous-time real options game. Assuming exogenous firm roles, we find that (i) as the leader installs its newly purchased capital, the follower's optimal investment policy displays a monotonically decreasing pattern, which finds its justifcation in the temporary reallocation of the leader's revenues to its competitor, and (ii) once the leader has completed its investment process, the follower's trigger boundary is proportional to the fixed cost of investment weighted by the present value of future revenues per unit of market demand. Moreover, we demonstrate that the follower's willingness to delay investment is enhanced by a longer time-to-build and a more volatile market demand, while it is weakened by a higher quality improvement upon replacement and by a higher expected growth in market demand. Finally, we study the probability that the follower mimics the leader?s decision within the leader's time-to-build window.
To our knowledge, this item is not available for
download. To find whether it is available, there are three
1. Check below under "Related research" whether another version of this item is available online.
2. Check on the provider's web page whether it is in fact available.
3. Perform a search for a similarly titled item that would be available.
|Date of creation:||Aug 2006|
|Contact details of provider:|| Postal: 270 Bay State Road, Boston, MA 02215|
Web page: http://www.bu.edu/econ/
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- 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.
- Doriana Ruffino & Jonathan Treussard, 2006. "A Study of Inaction in Investment Games via the Early Exercise Premium Representation," Boston University - Department of Economics - Working Papers Series WP2006-040, Boston University - Department of Economics.
- Huisman, K.J.M. & Kort, P.M., 1998. "A Further Analysis on Strategic Timing of Adoption of New Technologies under Uncertainty," Discussion Paper 1998-03, Tilburg University, Center for Economic Research.
- Tom Cottrell & Gordon Sick, 2001. "First-Mover (Dis) Advantage And Real Options," Journal of Applied Corporate Finance, Morgan Stanley, vol. 14(2), pages 41-51.
- Siim Kallast & Andi Kivinukk, 2003. "Pricing and Hedging American Options Using Approximations by Kim Integral Equations," Review of Finance, Springer, vol. 7(3), pages 361-383.
- Richard J. Gilbert & Richard G. Harris, 1984.
"Competition with Lumpy Investment,"
RAND Journal of Economics,
The RAND Corporation, vol. 15(2), pages 197-212, Summer.
- Robert C. Merton, 2005.
"Theory of rational option pricing,"
World Scientific Book Chapters,
in: Theory Of Valuation, chapter 8, pages 229-288
World Scientific Publishing Co. Pte. Ltd..
- Merton, Robert C., 1997.
"Applications of Option-Pricing Theory: Twenty-Five Years Later,"
Nobel Prize in Economics documents
1997-1, Nobel Prize Committee.
- Merton, Robert C, 1998. "Applications of Option-Pricing Theory: Twenty-Five Years Later," American Economic Review, American Economic Association, vol. 88(3), pages 323-349, June.
- Huisman, K.J.M. & Kort, P.M. & Pawlina, G. & Thijssen, J.J.J., 2003.
"Strategic Investment Under Uncertainty : Merging Real Options with Game Theory,"
2003-6, Tilburg University, Center for Economic Research.
- Huisman, K.J.M. & Kort, P.M. & Pawlina, G. & Thijssen, J.J.J., 2004. "Strategic investment under uncertainty : Merging real options with game theory," Other publications TiSEM 57b69510-cf54-479e-938e-d, Tilburg University, School of Economics and Management.
- Russell Cooper & John Haltiwanger & Laura Power, 1995.
"Machine Replacement and the Business Cycle: Lumps and Bumps,"
0062, Boston University - Industry Studies Programme.
- John Haltiwanger & Russell Cooper & Laura Power, 1999. "Machine Replacement and the Business Cycle: Lumps and Bumps," American Economic Review, American Economic Association, vol. 89(4), pages 921-946, September.
- Russell Cooper & John Haltiwanger & Laura Power, 1995. "Machine Replacement and the Business Cycle: Lumps and Bumps," NBER Working Papers 5260, National Bureau of Economic Research, Inc.
- Drew Fudenberg & Jean Tirole, 1985. "Preemption and Rent Equalization in the Adoption of New Technology," Review of Economic Studies, Oxford University Press, vol. 52(3), pages 383-401.
- Ricardo J. Caballero & Robert S. Pindyck, 1992.
"Uncertainty, Investment, and Industry Evolution,"
NBER Working Papers
4160, National Bureau of Economic Research, Inc.
- Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, number 5474.
- Peter Carr & Robert Jarrow & Ravi Myneni, 2008.
"Alternative Characterizations Of American Put Options,"
World Scientific Book Chapters,
in: Financial Derivatives Pricing Selected Works of Robert Jarrow, chapter 5, pages 85-103
World Scientific Publishing Co. Pte. Ltd..
- Peter Carr & Robert Jarrow & Ravi Myneni, 1992. "Alternative Characterizations Of American Put Options," Mathematical Finance, Wiley Blackwell, vol. 2(2), pages 87-106.
- Broadie, Mark & Detemple, Jerome, 1996. "American Option Valuation: New Bounds, Approximations, and a Comparison of Existing Methods," Review of Financial Studies, Society for Financial Studies, vol. 9(4), pages 1211-1250.
- Grossman, G.M. & Helpman, E., 1989.
"Quality Ledders In The Theory Of Growth,"
148, Princeton, Woodrow Wilson School - Public and International Affairs.
- Heidrun C. Hoppe & Ulrich Lehmann-Grube, 2001. "Second-Mover Advantages in Dynamic Quality Competition," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 10(3), pages 419-433, 09.
- Siim Kallast & Andi Kivinukk, 2003. "Pricing and Hedging American Options Using Approximations by Kim Integral Equations," Review of Finance, European Finance Association, vol. 7(3), pages 361-383.
- 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 1653-1679, December.
- S. D. Jacka, 1991. "Optimal Stopping and the American Put," Mathematical Finance, Wiley Blackwell, vol. 1(2), pages 1-14.
- Stenbacka, Rune & Tombak, Mihkel M., 1994. "Strategic timing of adoption of new technologies under uncertainty," International Journal of Industrial Organization, Elsevier, vol. 12(3), pages 387-411, September.
When requesting a correction, please mention this item's handle: RePEc:bos:wpaper:wp2006-044. 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: (Gillian Gurish)
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 references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link 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 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.