Optimal Timing of Real Estate Investment Under an Asymmetric Duopoly
Posted: 9 Nov 2006
Abstract
This paper examines the sub-game equilibrium strategies for a duopoly real option model consisting of two firms with asymmetric demand functions. The relative strength of the firms is found to have significant impact on the firms' equilibrium strategies. Preemptive strategies are critical if difference in strength between the two competing firms is relatively small. Short bursts and recession induced overbuilding are two outcomes in the asymmetric duopoly model. The model, however, predicts that the two phenomena occur in earlier phases of market cycles, rather than in the state of depression. In a depressed market with high volatility, the leader and the follower will both choose the waiting strategies. Construction cascade is, therefore, not an expected phenomenon in a depressed market in the asymmetric duopoly framework.
Keywords: dupology game, real options, premptive strategies, and asymmetric demands
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