Symmetric equilibrium strategies in game theoretic real option models

J.J.J. Thijssen, K.J.M. Huisman, P.M. Kort

Research output: Contribution to journalArticleScientificpeer-review

Abstract

This paper considers the problem of investment timing under uncertainty in a duopoly framework. When both firms want to be the first investor a coordination problem arises. Here, a method is proposed to deal with this coordination problem, involving the use of symmetric mixed strategies.

The method is based on Fudenberg and Tirole [Fudenberg, D., Tirole, J., 1985. Preemption and rent equalization in the adoption of new technology. Review of Economic Studies 52, 383–401], where it was designed within a deterministic framework. This paper extends the applicability of this method to a stochastic environment. The need for this is exemplified by the fact that ever more contributions in multiple firm real option models make unsatisfactory assumptions to solve the coordination problem mentioned above. Moreover, our approach allows us to show that in many cases it is incorrect to claim that, in equilibrium, the probability that both firms invest simultaneously while it is only optimal for one firm to invest, is zero.
Original languageEnglish
Pages (from-to)219-225
JournalJournal of Mathematical Economics
Volume48
Issue number4
DOIs
Publication statusPublished - 2012

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Real Options
Game
Economics
Mixed Strategy
Preemption
Equalization
Model
Timing
Uncertainty
Strategy
Business
Real options
Zero
Coordination problems
Framework

Cite this

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Symmetric equilibrium strategies in game theoretic real option models. / Thijssen, J.J.J.; Huisman, K.J.M.; Kort, P.M.

In: Journal of Mathematical Economics, Vol. 48, No. 4, 2012, p. 219-225.

Research output: Contribution to journalArticleScientificpeer-review

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