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A Game Model Of Irreversible Investment Under Uncertainty

Author

Listed:
  • PAULI MURTO

    (Systems Analysis Laboratory, Helsinki University of Technology, P.O. Box 1100, 02015 HUT, Finland)

  • JUSSI KEPPO

    (Department of Industrial and Operations Engineering, University of Michigan, 1205 Beal Avenue, Ann Arbor, MI, 48109-2117, USA)

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.

Suggested Citation

  • Pauli Murto & Jussi Keppo, 2002. "A Game Model Of Irreversible Investment Under Uncertainty," International Game Theory Review (IGTR), World Scientific Publishing Co. Pte. Ltd., vol. 4(02), pages 127-140.
    • Handle: RePEc:wsi:igtrxx:v:04:y:2002:i:02:n:s0219198902000604
    DOI: 10.1142/S0219198902000604
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    Citations

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    Cited by:

    1. Arasteh, Abdollah, 2017. "Considering the investment decisions with real options games approach," Renewable and Sustainable Energy Reviews, Elsevier, vol. 72(C), pages 1282-1294.
    2. Murto, Pauli & Nasakkala, Erkka & Keppo, Jussi, 2004. "Timing of investments in oligopoly under uncertainty: A framework for numerical analysis," European Journal of Operational Research, Elsevier, vol. 157(2), pages 486-500, September.
    3. repec:pra:mprapa:40679 is not listed on IDEAS
    4. Gianluca Femminis & Gianmaria Martini, 2008. "Irreversible R&D investment with inter-firm spillovers," DISCE - Quaderni dell'Istituto di Teoria Economica e Metodi Quantitativi compila la segreteria, Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE).
    5. Keppo, Jussi & Lu, Hao, 2003. "Real options and a large producer: the case of electricity markets," Energy Economics, Elsevier, vol. 25(5), pages 459-472, September.
    6. Adrian Werner, Kristin Tolstad Uggen, Marte Fodstad, Arnt-Gunnar Lium, and Ruud Egging, 2014. "Stochastic Mixed-Integer Programming for Integrated Portfolio Planning in the LNG Supply Chain," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1).
    7. Wang, Congcong & Chen, Shanshan & Wang, Yuhan & Pansera, Bruno Antonio & Luckraz, Shravan, 2023. "On the welfare and policy implications of a two-period real option game," Socio-Economic Planning Sciences, Elsevier, vol. 90(C).
    8. Azevedo, Alcino & Paxson, Dean, 2014. "Developing real option game models," European Journal of Operational Research, Elsevier, vol. 237(3), pages 909-920.
    9. Femminis, Gianluca & Martini, Gianmaria, 2011. "Irreversible investment and R&D spillovers in a dynamic duopoly," Journal of Economic Dynamics and Control, Elsevier, vol. 35(7), pages 1061-1090, July.

    More about this item

    Keywords

    Real options; irreversible investment; game theory; uncertainty; telecommunication;
    All these keywords.

    JEL classification:

    • B4 - Schools of Economic Thought and Methodology - - Economic Methodology
    • C0 - Mathematical and Quantitative Methods - - General
    • C6 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling
    • C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory
    • D5 - Microeconomics - - General Equilibrium and Disequilibrium
    • D7 - Microeconomics - - Analysis of Collective Decision-Making
    • M2 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics

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