Non-Exclusive Real Options with First-Mover Advantages
36 Pages Posted: 12 May 2008
Date Written: May 2008
This paper analyses the exercise decision of non-exclusive real options in a two-player setting. A general model of non-exclusive real options, allowing the underlying asset to follow any strong Markov process is developed, thus extending the existing literature, which is mainly based on one-dimensional geometric Brownian motion. For games with a first-mover advantage it is proved that an equilibrium with the rent-equalization property exists. It is also shown that many more exercise scenarios are possible than in deterministic timing games. As an example, a duopoly where two firms can adopt a new technology, whose profitability follows a two-dimensional, correlated geometric Brownian motion is studied.
Keywords: Timing games, Real options, Rent equalization, Technology adoption
JEL Classification: C73, D81, O32
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