Effects of Strategic Interactions on the Option Value of Waiting

Research output: Working paperDiscussion paperOther research output

379 Downloads (Pure)

Abstract

This paper considers an investment timing problem in a duopoly framework. The results of the seminal contribution by Fudenberg en Tirole (1985, RES) are extended by introduction of uncertainty. Three scenarios are identified. In the first scenario we have a preemption equilibrium with dispersed investment timing, while in the second scenario an equilibrium with joint investment prevails. In the third scenario preemption holds in case uncertainty is low, and joint investment is the Pareto dominating equilibrium if uncertainty is large. From the theory of real options it is known that it is optimal to invest when the net present value exceeds the option value of waiting. In this paper we modify the real options investment rule by taking into account strategic interactions. Now the net present value must be compared with the so-called strategic option value of waiting. It can be shown that, compared to the option value of waiting in the monopoly case, the strategic option value of waiting is the same in the joint investment case and lower in the preemption equilibrium. In the latter case it can even occur that investing is optimal, while the net present value is negative.
Original languageEnglish
Place of PublicationTilburg
PublisherMicroeconomics
Number of pages41
Volume1999-92
Publication statusPublished - 1999

Publication series

NameCentER Discussion Paper
Volume1999-92

Keywords

  • Investment
  • timing game
  • real options

Fingerprint Dive into the research topics of 'Effects of Strategic Interactions on the Option Value of Waiting'. Together they form a unique fingerprint.

  • Cite this

    Huisman, K. J. M., & Kort, P. M. (1999). Effects of Strategic Interactions on the Option Value of Waiting. (CentER Discussion Paper; Vol. 1999-92). Microeconomics.