Effects of Strategic Interactions on the Option Value of Waiting

CentER Working Paper Series No. 1999-92

Posted: 14 Apr 2000

See all articles by Kuno Huisman

Kuno Huisman

Tilburg University, CentER; ASML

Peter M. Kort

Tilburg University - Department of Econometrics & Operations Research; Tilburg University - Center for Economic Research (CentER)

Date Written: 1999

Abstract

This paper considers an investment timing problem in a duopoly framework. The results of the seminal contribution by Fudenberg en Tirole (1985, RES) are extended by introduction of uncertainty. Three scenarios are identified. In the first scenario we have a preemption equilibrium with dispersed investment timing, while in the second scenario an equilibrium with joint investment prevails. In the third scenario preemption holds in case uncertainty is low, and joint investment is the Pareto dominating equilibrium if uncertainty is large. From the theory of real options it is known that it is optimal to invest when the net present value exceeds the option value of waiting. In this paper we modify the real options investment rule by taking into account strategic interactions. Now the net present value must be compared with the so-called strategic option value of waiting. It can be shown that, compared to the option value of waiting in the monopoly case, the strategic option value of waiting is the same in the joint investment case and lower in the preemption equilibrium. In the latter case it can even occur that investing is optimal, while the net present value is negative.

JEL Classification: C73, D81, L13

Suggested Citation

Huisman, Kuno J.M. and Huisman, Kuno J.M. and Kort, Peter, Effects of Strategic Interactions on the Option Value of Waiting (1999). CentER Working Paper Series No. 1999-92, Available at SSRN: https://ssrn.com/abstract=200116

Kuno J.M. Huisman (Contact Author)

Tilburg University, CentER ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

ASML ( email )

De Run 6501
Veldhoven, 5504 DR
Netherlands

Peter Kort

Tilburg University - Department of Econometrics & Operations Research ( email )

Tilburg, 5000 LE
Netherlands
+31 13 466 2062 (Phone)
+31 13 466 3072 (Fax)

HOME PAGE: http://center.uvt.nl/staff/kort/

Tilburg University - Center for Economic Research (CentER) ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands
+31 13 466 2062 (Phone)
+31 13 466 3072 (Fax)

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