Symmetric Equilibrium Strategies in Game Theoretical Real Option Models

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

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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 (1985, Review of Economic Studies), where it was designed within a deterministic framework.The aim of our paper is to extend the applicability of this method to a stochastic environment.The need for this is exemplified by the fact that several recent 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 "the probability that both firms invest simultaneously, while it is only optimal for one firm to invest, is zero".
Original languageEnglish
Place of PublicationTilburg
PublisherMicroeconomics
Number of pages21
Volume2002-81
Publication statusPublished - 2002

Publication series

NameCentER Discussion Paper
Volume2002-81

Keywords

  • investment
  • game theory
  • uncertainty

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