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

Wencheng Yu, Xingang Wen, Nick F. D. Huberts and Peter Kort

Journal of the Operational Research Society, 2024, vol. 75, issue 9, 1855-1872

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.

Date: 2024
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DOI: 10.1080/01605682.2023.2281535

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