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Strategic investment under uncertainty: why multi-option firms lose the preemption run

Author

Listed:
  • Wencheng Yu
  • Xingang Wen
  • Nick F. D. Huberts
  • Peter M. Kort

Abstract

We consider a dynamic duopoly game where firms choose both the timing and size of their investments. The existing real options literature predominantly consists of contributions where firms have a single option to invest. This paper relaxes this assumption by giving Firm A multiple options to undertake further investments with the purpose to expand whereas Firm B only holds the option to enter the market. In this asymmetric setting we get the surprising result that, in equilibrium, Firm B invests first. If Firm A invests first, Firm A and Firm B keep on being involved in preemption games for subsequent investments until Firm B enters the market, which leads to inefficiently early investments of Firm A. When Firm B invests first, then only one preemption game is played, which leads to Firm A being free to choose its unrestricted optimal investment moments.

Suggested Citation

  • Wencheng Yu & Xingang Wen & Nick F. D. Huberts & Peter M. Kort, 2024. "Strategic investment under uncertainty: why multi-option firms lose the preemption run," Journal of the Operational Research Society, Taylor & Francis Journals, vol. 75(9), pages 1855-1872, September.
    • Handle: RePEc:taf:tjorxx:v:75:y:2024:i:9:p:1855-1872
    DOI: 10.1080/01605682.2023.2281535
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