Real Options and Signaling in Strategic Investment Games

Takahiro Watanabe

No 809, KIER Working Papers from Kyoto University, Institute of Economic Research

Abstract: A game in which an incumbent and an entrant decide the timings of entries into a new market is investigated. The profit flows involve two uncertain factors: (1) the basic level of the demand of the market observed only by the incumbent and (2) the fluctuation of the profit flow described by a geometric Brownian motion that is common to both firms. The optimal timing for the incumbent, who privately knows the high demand, is earlier than that for the low-demand incumbent. This earlier entrance, however, reveals the information of the high demand to the entrant, so that the entrant observing the timing of the incumbent would accelerate the its own timing of the investment that reduces the monopolistic profit of the incumbent. Therefore, the high-demand incumbent may delay the timing of the investment in order to hide the information strategically. The equilibria of this signaling game are characterized, and the conditions for the manipulative revelation are investigated. The values of both firms are compared with the case of complete information.

Keywords: Real Option; Investment Timing; Signaling; Asymmetric Information; Game Theory (search for similar items in EconPapers)
JEL-codes: C73 D81 G31 (search for similar items in EconPapers)
Date: 2012-01
New Economics Papers: this item is included in nep-com, nep-cta, nep-gth and nep-mic
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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