Real options in an asymmetric duopoly

Who benefits from your competitive disadvantage?

Peter Kort, G. Pawlina

Research output: Contribution to journalArticleScientificpeer-review

Abstract

This paper analyzes the impact of investment cost asymmetry on the optimal real option exercise strategies and the value of firms in duopoly. Both firms have an opportunity to invest in a project enhancing (ceteris paribus) the profit flow. We show that three types of equilibrium strategies exist. Furthermore, we express the critical levels of cost asymmetry delineating the equilibrium regions as functions of basic economic variables. The presence of strategic interactions among the firms leads to counterintuitive results. First, for a certain range of the asymmetry level, a marginal increase in the investment cost of the firm with the cost disadvantage can enhance this firm's own value. Moreover, such a cost increase can reduce the value of the competitor. Finally, we discuss the welfare implications of the optimal exercise strategies and show that the presence of identical firms can result in a socially less desirable outcome than if one of the competitors has a significant cost (dis)advantage.
Original languageEnglish
Pages (from-to)1–35
JournalJournal of Economics & Management Strategy
Volume15
Issue number1
DOIs
Publication statusPublished - 6 Jan 2006

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Costs
Real options
Disadvantage
Duopoly
Profitability
Economics
Competitors
Cost asymmetry
Exercise
Economic variables
Asymmetry
Ceteris paribus
Profit
Welfare implications
Firm value
Strategic interaction

Cite this

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Real options in an asymmetric duopoly : Who benefits from your competitive disadvantage? / Kort, Peter; Pawlina, G.

In: Journal of Economics & Management Strategy, Vol. 15, No. 1, 06.01.2006, p. 1–35.

Research output: Contribution to journalArticleScientificpeer-review

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