Competitive Real Options under Private Information

53 Pages Posted: 20 Sep 2016 Last revised: 20 Nov 2017

See all articles by Leandro Gorno

Leandro Gorno

FGV EPGE Brazilian School of Economics and Finance

Felipe Iachan

FGV

Date Written: November 17, 2017

Abstract

We study a research and development race by extending the standard investment under uncertainty framework. Firms observe the stochastic evolution of their own potential payoffs from entry into a market, while conjecturing about the unobserved state of their opponents. They face a trade-off between immediate entry or delay, under the threat of preemption by a rival. We analytically characterize both stationary Markov perfect equilibria and the transitions using a coupled system of differential equations. For standard initial conditions, the transitions display long-lived dynamics and an intensity of competition that first builds and then subsides slowly towards a steady state. We also discuss comparative statics regarding development speed, uncertainty, and asymmetries between players.

Keywords: real options, uncertainty, investment, learning, competition, private information

JEL Classification: C73, D92, G31

Suggested Citation

Gorno, Leandro and Iachan, Felipe, Competitive Real Options under Private Information (November 17, 2017). Available at SSRN: https://ssrn.com/abstract=2839899 or http://dx.doi.org/10.2139/ssrn.2839899

Leandro Gorno (Contact Author)

FGV EPGE Brazilian School of Economics and Finance ( email )

Praia de Botafogo 190
Rio de Janeiro, RJ 22250-900
Brazil

Felipe Iachan

FGV ( email )

Praia de Botofogo, 190
Rio de Janeiro, RJ 22411-060
Brazil

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