The Investment Game under Uncertainty: An Analysis of Equilibrium Values in the Presence of First or Second Mover Advantage

Junichi Imai and Takahiro Watanabe
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Junichi Imai: Graduate School of Economics and Management, Tohoku University, Japan

Chapter 9 in Stochastic Processes and Applications to Mathematical Finance, 2007, pp 151-172 from World Scientific Publishing Co. Pte. Ltd.

Abstract: AbstractIn this paper we develop a valuation model when there exist two competitive firms that face irreversible investment decisions under the demand uncertainty. We propose a numerical procedure to derive both project values and equilibrium strategies in the duopolistic environment. In numerical examples we consider two different economic conditions, which are labelled first mover advantage and second mover advantage, and examine the effects of these conditions on the equilibrium strategies as well as the project values. We show that these conditions cause significant changes in the equilibrium strategies of both firms.

Keywords: Stochastic Calculus; Mathematical Finance; Insider Trading; Stochastic Control; Real Options; Filtering Model of Credit Risks; Stochastic Growth Models (search for similar items in EconPapers)
Date: 2007
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