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Real Options and Signaling in Strategic Investment Games

  • Takahiro Watanabe

    ()

    (Department of Business Administration, Tokyo Metropolitan University)

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    A game in which an incumbent and an entrant decide the timings of entries into a new market is investigated. The profit flows involve two uncertain factors: (1) the basic level of the demand of the market observed only by the incumbent and (2) the fluctuation of the profit flow described by a geometric Brownian motion that is common to both firms. The optimal timing for the incumbent, who privately knows the high demand, is earlier than that for the low-demand incumbent. This earlier entrance, however, reveals the information of the high demand to the entrant, so that the entrant observing the timing of the incumbent would accelerate the its own timing of the investment that reduces the monopolistic profit of the incumbent. Therefore, the high-demand incumbent may delay the timing of the investment in order to hide the information strategically. The equilibria of this signaling game are characterized, and the conditions for the manipulative revelation are investigated. The values of both firms are compared with the case of complete information.

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    File URL: http://www.kier.kyoto-u.ac.jp/DP/DP809.pdf
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    Paper provided by Kyoto University, Institute of Economic Research in its series KIER Working Papers with number 809.

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    Date of creation: Jan 2012
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    Handle: RePEc:kyo:wpaper:809
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    1. Shibata, Takashi & Nishihara, Michi, 2010. "Dynamic investment and capital structure under manager-shareholder conflict," Journal of Economic Dynamics and Control, Elsevier, vol. 34(2), pages 158-178, February.
    2. repec:ner:tilbur:urn:nbn:nl:ui:12-84087 is not listed on IDEAS
    3. Grenadier, Steven R. & Wang, Neng, 2005. "Investment timing, agency, and information," Journal of Financial Economics, Elsevier, vol. 75(3), pages 493-533, March.
    4. Shibata, Takashi, 2009. "Investment timing, asymmetric information, and audit structure: A real options framework," Journal of Economic Dynamics and Control, Elsevier, vol. 33(4), pages 903-921, April.
    5. repec:dgr:kubcen:199992 is not listed on IDEAS
    6. Morellec, Erwan & Schürhoff, Norman, 2011. "Corporate investment and financing under asymmetric information," Journal of Financial Economics, Elsevier, vol. 99(2), pages 262-288, February.
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