Real Options in a Duopoly with Jump Diffusion Prices

Wei Sun, Yonggan Zhao () and Leonard MacLean ()
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Wei Sun: School of Management, Xi’an Jiaotong University, Xi’an City, Shaanxi Province 710049, P. R. China
Yonggan Zhao: Rowe School of Business, Halifax, Nova Scotia B3H 4R2, Canada
Leonard MacLean: Rowe School of Business, Halifax, Nova Scotia B3H 4R2, Canada

Asia-Pacific Journal of Operational Research (APJOR), 2021, vol. 38, issue 06, 1-29

Abstract: This paper analyzes irreversible investments in technology under asymmetric duopoly. Asset prices are defined by a diffusion with Poisson jumps. Assuming negative externalityfor profit flows, we develop a real options and game theoretic valuation model to evaluate the optimal investment strategies under interaction. Three types of equilibrium, i.e., simultaneous equilibrium, preemptive equilibrium, and sequential equilibrium, are attainable depending on the firms’ competitive advantageand first-mover advantage. The role of a firm, as “leader†, “follower†, or “simultaneous entrant†, is analyzed both exogenously and endogenously. We find that preemptive competition lowers both firms’ profits from the investments in the technology. Numerical examples illustrate the key results.

Keywords: Game theory; real options; jump-diffusion process; optimal equilibrium (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1142/S0217595921500093

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