A Game Model of Irreversible Investment Under Uncertainty

International Game Theory Review, Vol. 4, No. 2, pp. 127-140, 2002

Posted: 29 Sep 2009

See all articles by Pauli Murto

Pauli Murto

Helsinki School of Economics & Business Administration

Jussi Keppo

National University of Singapore - NUS Business School

Abstract

Most of the literature on real options considers the optimal decision of a firm in isolation from competitors. In reality, however, the actions of competing firms often affect each other's investment opportunities. We develop a game model where many firms compete for a single investment opportunity. When one of the firms triggers the investment the opportunity is completely lost for the other firms. The value of the project for the firms is assumed to follow a geometric Brownian motion. The model combines game theory and the theory of irreversible investment under uncertainty. We characterize the resulting Nash equilibrium under different assumptions on the information that the firms have about each other's valuations for the project. As an example, we present a case of building a telecommunications network.

Keywords: Real options, irreversible investment, game theory, uncertainty, telecommunication

Suggested Citation

Murto, Pauli and Keppo, Jussi, A Game Model of Irreversible Investment Under Uncertainty. International Game Theory Review, Vol. 4, No. 2, pp. 127-140, 2002. Available at SSRN: https://ssrn.com/abstract=477121

Pauli Murto (Contact Author)

Helsinki School of Economics & Business Administration ( email )

P.O. Box 21210
Helsinki 00100, 00101
Finland

Jussi Keppo

National University of Singapore - NUS Business School ( email )

1 Business Link
Singapore, 117592
Singapore

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