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Strategic investment under uncertainty : Merging real options with game theory

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Listed:
  • Huisman, K.J.M.

    (Tilburg University, School of Economics and Management)

  • Kort, P.M.

    (Tilburg University, School of Economics and Management)

  • Pawlina, G.

    (Tilburg University, School of Economics and Management)

  • Thijssen, J.J.J.

    (Tilburg University, School of Economics and Management)

Abstract

As becomes apparent from the standard text books in industrial organization (cf.Tirole, 1988, The Theory of Industrial Organization), the analysis of the e.ects of uncertainty within this field is yet underdeveloped.This paper shows that the new theory of strategic real options can be used to fill this empty hole .Based on the work by Smets (1991) standard models are identified, and they are analyzed by applying a method involving symmetric mixed strategies.As an illustration, extensions regarding asymmetry, technology adoption and decreasing uncertainty over time are reviewed.Among others, it is found that the value of a high cost firm can increase in its own cost.Furthermore, it is established to what extent investments are delayed when technologial progress is anticipated, and it is found that competition can be bad for welfare.
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Suggested Citation

  • 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.
  • Handle: RePEc:tiu:tiutis:57b69510-cf54-479e-938e-de7c2e382820
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    References listed on IDEAS

    as
    1. Thijssen, J.J.J., 2003. "Investment under uncertainty, market evolution and coalition spillovers in a game theoretic perspective," Other publications TiSEM 672073a6-492e-4621-8d4a-0, Tilburg University, School of Economics and Management.
    2. Huisman, Kuno J. M. & Kort, Peter M., 2004. "Strategic technology adoption taking into account future technological improvements: A real options approach," European Journal of Operational Research, Elsevier, vol. 159(3), pages 705-728, December.
    3. Thijssen, Jacco J. J. & Huisman, Kuno J. M. & Kort, Peter M., 2004. "The effect of information streams on capital budgeting decisions," European Journal of Operational Research, Elsevier, vol. 157(3), pages 759-774, September.
    4. Thijssen, Jacco J.J. & Huisman, Kuno J.M. & Kort, Peter M., 2012. "Symmetric equilibrium strategies in game theoretic real option models," Journal of Mathematical Economics, Elsevier, vol. 48(4), pages 219-225.
    5. Pawlina, G. & Kort, P.M., 2001. "Strategic Capital Budgeting : Asset Replacement Under Uncertainty," Other publications TiSEM e79e30d8-bf35-4cde-ae02-f, Tilburg University, School of Economics and Management.
    6. Enrico Pennings, 2004. "Optimal Pricing And Quality Choice When Investment In Quality Is Irreversible," Journal of Industrial Economics, Wiley Blackwell, vol. 52(4), pages 569-589, December.
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    9. Marcel Boyer & Pierre Lasserre & Thomas Mariotti & Michel Moreaux, 2001. "Real Options, Preemption, and the Dynamics of Industry Investments," CIRANO Working Papers 2001s-64, CIRANO.
    10. Weeds, Helen & Mason, Robin, 2001. "Irreversible Investment with Strategic Interactions," CEPR Discussion Papers 3013, C.E.P.R. Discussion Papers.
    11. Nielsen, Martin J., 2002. "Competition and irreversible investments," International Journal of Industrial Organization, Elsevier, vol. 20(5), pages 731-743, May.
    12. Huisman, Kuno J. M. & Kort, Peter M., 2003. "Strategic investment in technological innovations," European Journal of Operational Research, Elsevier, vol. 144(1), pages 209-223, January.
    13. Lambrecht, Bart & Perraudin, William, 2003. "Real options and preemption under incomplete information," Journal of Economic Dynamics and Control, Elsevier, vol. 27(4), pages 619-643, February.
    14. Weeds, Helen & Mason, Robin, 2002. "The Failing Firm Defence: Merger Policy and Entry," CEPR Discussion Papers 3664, C.E.P.R. Discussion Papers.
    15. Grzegorz Pawlina & Peter M. Kort, 2006. "Real Options in an Asymmetric Duopoly: Who Benefits from Your Competitive Disadvantage?," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 15(1), pages 1-35, March.
    16. Lambrecht, Bart M, 2001. "The Impact of Debt Financing on Entry and Exit in a Duopoly," Review of Financial Studies, Society for Financial Studies, vol. 14(3), pages 765-804.
    17. 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.
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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. Heikkinen, T. & Pietola, K., 2009. "Investment and the dynamic cost of income uncertainty: The case of diminishing expectations in agriculture," European Journal of Operational Research, Elsevier, vol. 192(2), pages 634-646, January.
    3. Bouis, Romain & Huisman, Kuno J.M. & Kort, Peter M., 2009. "Investment in oligopoly under uncertainty: The accordion effect," International Journal of Industrial Organization, Elsevier, vol. 27(2), pages 320-331, March.
    4. Steg, Jan-Henrik & Thijssen, Jacco J.J., 2023. "Strategic investment with positive externalities," Games and Economic Behavior, Elsevier, vol. 138(C), pages 1-21.
    5. de Villemeur, Etienne Billette & Ruble, Richard & Versaevel, Bruno, 2013. "Caveat preemptor: Coordination failure and success in a duopoly investment game," Economics Letters, Elsevier, vol. 118(2), pages 250-254.
    6. 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.
    7. Randrianarisoa, Laingo M. & Zhang, Anming, 2019. "Adaptation to climate change effects and competition between ports: Invest now or later?," Transportation Research Part B: Methodological, Elsevier, vol. 123(C), pages 279-322.
    8. repec:dau:papers:123456789/12655 is not listed on IDEAS
    9. YongQiang Chu & Tien Sing, 2007. "Optimal Timing of Real Estate Investment under an Asymmetric Duopoly," The Journal of Real Estate Finance and Economics, Springer, vol. 34(3), pages 327-345, April.
    10. Pietola, Kyosti & Myyra, Sami & Pouta, Eija, 2009. "Fiscal and trade distorting effects of capital gains tax on land sales - empirical evidence from agricultural land market in Finland," Discussion Papers 50040, MTT Agrifood Research Finland.
    11. Faninam, Farzan & Huisman, Kuno J.M. & Kort, Peter M., 2023. "Strategic investment under uncertainty in a triopoly market: Timing and capacity choice," European Journal of Operational Research, Elsevier, vol. 308(2), pages 897-911.
    12. Chevalier-Roignant, Benoît & Flath, Christoph M. & Huchzermeier, Arnd & Trigeorgis, Lenos, 2011. "Strategic investment under uncertainty: A synthesis," European Journal of Operational Research, Elsevier, vol. 215(3), pages 639-650, December.
    13. Kong, Jean J. & Kwok, Yue Kuen, 2007. "Real options in strategic investment games between two asymmetric firms," European Journal of Operational Research, Elsevier, vol. 181(2), pages 967-985, September.
    14. Nick Huberts & Kuno Huisman & Peter Kort & Maria Lavrutich, 2015. "Capacity Choice in (Strategic) Real Options Models: A Survey," Dynamic Games and Applications, Springer, vol. 5(4), pages 424-439, December.
    15. Amal Abdel Razzac & Linda Salahaldin & Salah Eddine Elayoubi & Yezekael Hayel & Tijani Chahed, 2017. "A Game Theoretical Real Options Framework for Investment Decisions in Mobile TV Infrastructure," Asia-Pacific Journal of Operational Research (APJOR), World Scientific Publishing Co. Pte. Ltd., vol. 34(04), pages 1-34, August.
    16. Daniela Grieco, 2012. "Economics Perspectives on the Entrepreneurial Decision," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 19(3), pages 451-467, November.
    17. Dimitrios Zormpas, 2017. "How vertical relationships and external funding affect investment efficiency and timing?," 2017 Papers pzo81, Job Market Papers.
    18. Roques, Fabien A. & Savva, Nicos, 2009. "Investment under uncertainty with price ceilings in oligopolies," Journal of Economic Dynamics and Control, Elsevier, vol. 33(2), pages 507-524, February.

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