Real Options in Strategic Investment Games between Two Asymmetric Firms

33 Pages Posted: 28 Feb 2006

See all articles by Jean Kong

Jean Kong

Hong Kong University of Science & Technology

Yue Kuen Kwok

Hong Kong University of Science & Technology - Department of Mathematics

Date Written: March 13, 2006

Abstract

This paper examines strategic investment games between two firms that compete for optimal entry in a project that generates uncertain revenue flows. Under asymmetry on both the sunk cost of investment and revenue flows of the two competing firms, we investigate the value of real investment options and strategic interaction of investment decisions. We provide a complete characterization of pre-emptive, dominant and simultaneous equilibriums by analyzing the relative value of leader's and follower's optimal investment thresholds. In a duopoly market with negative externalities, a firm may prevent loss of real options value by selecting appropriate pre-emptive entry. Under positive externalities, firms do not compete to lead.

Keywords: Real options, strategic investment games, pre-emption

JEL Classification: G31, D81, O31

Suggested Citation

Kong, Jean and Kwok, Yue Kuen, Real Options in Strategic Investment Games between Two Asymmetric Firms (March 13, 2006). Available at SSRN: https://ssrn.com/abstract=886943 or http://dx.doi.org/10.2139/ssrn.886943

Jean Kong

Hong Kong University of Science & Technology ( email )

Clearwater Bay
Kowloon, 999999
Hong Kong

Yue Kuen Kwok (Contact Author)

Hong Kong University of Science & Technology - Department of Mathematics ( email )

Clearwater Bay
Kowloon, 999999
Hong Kong

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