Strategic Investment Under Uncertainty: Merging Real Options with Game Theory

CentER Discussion Paper No. 2003-06

22 Pages Posted: 14 May 2004  

Kuno Huisman

Tilburg University, CentER; ASML

Peter M. Kort

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

Grzegorz Pawlina

Lancaster University - Department of Accounting and Finance

Jacco Thijssen

University of York - The York Management School

Date Written: January 2003

Abstract

As becomes apparent from the standard text books in industrial organization (cf. Tirole, 1988, The Theory of Industrial Organization), the analysis of the effects of uncertainty within this field is yet underdeveloped. This paper shows that the new theory of strategic real options can be used to fill this empty hole. Based on the work by Smets (1991) standard models are identified, and they are analyzed by applying a method involving symmetric mixed strategies. As an illustration, extensions regarding asymmetry, technology adoption and decreasing uncertainty over time are reviewed. Among others, it is found that the value of a high cost firm can increase in its own cost. Furthermore, it is established to what extent investments are delayed when technologial progress is anticipated, and it is found that competition can be bad for welfare.

Suggested Citation

Huisman, Kuno and Kort, Peter M. and Pawlina, Grzegorz and Thijssen, Jacco, Strategic Investment Under Uncertainty: Merging Real Options with Game Theory (January 2003). CentER Discussion Paper No. 2003-06. Available at SSRN: https://ssrn.com/abstract=545543 or http://dx.doi.org/10.2139/ssrn.545543

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)

Grzegorz Pawlina

Lancaster University - Department of Accounting and Finance ( email )

The Management School
Lancaster LA1 4YX
United Kingdom
+ 44 1524 592834 (Phone)
+ 44 1524 847321 (Fax)

Jacco Thijssen

University of York - The York Management School ( email )

Sally Baldwin Buildings
Heslington
York, North Yorkshire YO10 5DD
United Kingdom

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