Preemptive Investment Game with Alternative Projects

Michi Nishihara ()
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Michi Nishihara: Graduate School of Economics, Osaka University

No 09-16, Discussion Papers in Economics and Business from Osaka University, Graduate School of Economics

Abstract: This paper derives a preemptive equilibrium in strategic investment in alternative projects. The problem is formulated in a real options model with a multidimensional state variable that represents project-specific uncertainty. The proposed method enables us to evaluate the value of potential alternatives. The results not only extend previous studies with a one-dimensional state variable but also reveal new findings. Preemptive investment takes place earlier and the project value becomes lower if the numbers of both firms and projects increase by the same amount. Interestingly, a strong correlation among profits from projects, unlike in a monopoly, plays a positive role in moderating preemptive competition.

Keywords: strategic real options; preemption; alternative projects; stopping game. (search for similar items in EconPapers)
JEL-codes: C73 G13 G31 (search for similar items in EconPapers)
Pages: 21 pages
Date: 2009-06
New Economics Papers: this item is included in nep-bec, nep-gth and nep-ppm
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