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Strategic investment under uncertainty: why multi-option firms lose the preemption run.
- Source :
- Journal of the Operational Research Society; Sep2024, Vol. 75 Issue 9, p1855-1872, 18p
- Publication Year :
- 2024
-
Abstract
- We consider a dynamic duopoly game where firms choose both the timing and size of their investments. The existing real options literature predominantly consists of contributions where firms have a single option to invest. This paper relaxes this assumption by giving Firm A multiple options to undertake further investments with the purpose to expand whereas Firm B only holds the option to enter the market. In this asymmetric setting we get the surprising result that, in equilibrium, Firm B invests first. If Firm A invests first, Firm A and Firm B keep on being involved in preemption games for subsequent investments until Firm B enters the market, which leads to inefficiently early investments of Firm A. When Firm B invests first, then only one preemption game is played, which leads to Firm A being free to choose its unrestricted optimal investment moments. [ABSTRACT FROM AUTHOR]
- Subjects :
- OPTIONS (Finance)
DECISION making
DYNAMIC programming
GAME theory
EQUILIBRIUM
Subjects
Details
- Language :
- English
- ISSN :
- 01605682
- Volume :
- 75
- Issue :
- 9
- Database :
- Complementary Index
- Journal :
- Journal of the Operational Research Society
- Publication Type :
- Academic Journal
- Accession number :
- 179170541
- Full Text :
- https://doi.org/10.1080/01605682.2023.2281535