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Real options in strategic investment games between two asymmetric firms

Authors Kong, Jean J. HKUST affiliated (currently or previously).
Kwok, Yue Kuen View this author's profile
Issue Date 2007
Source European Journal of Operational Research , v. 181, (2), 2007, SEP 1, p. 967-985
Summary 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. Compared to earlier models that only allow for asymmetry on sunk cost, our model demonstrates a richer set of strategic interactions of entry 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 reduce loss of real options value by selecting appropriate pre-emptive entry. When one firm has a dominant advantage over its competitor, both the dominant firm and dominated firm enter at their respective leader's and follower's optimal thresholds. When the pre-emptive thresholds of both firms happen to coincide, the two firms enter simultaneously. Under positive externalities, firms do not compete to lead. (c) 2006 Elsevier B.V. All rights reserved.
ISSN 0377-2217
Rights European Journal of Operational Research © copyright (2007) Elsevier. The Journal's web site is located at
Language English
Format Article
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