Research on Competitive Investment under Uncertainty: An Expansion Model Based on Real Options and Game Theory

Within the context of investment under uncertainty, the real options literature prescribes optimal investment rules under uncertainty. However, Most of the literature on real options considers the optimal decision of a firm in isolation from competitors. In reality, the competitive interactions that occur substantially complicate the solutions of the problem since the decision maker has to take into account not only the factors that affect her/his own decisions, but also the factors that affect the decisions of the other investors. The real options framework utilized to deal with investments under uncertainty is extended to incorporate the game theoretic concepts required to deal with these interactions. In a real options and game-theoretic framework, this paper develops a single firm´s optimal investment model. The interaction of firms can be divided into two kinds: cooperative and noncooperative investment. We show that two competing firms´ fear of preemption would appear to undermine option value of delay. We also show that the value of leader and the follower, leader´s investment timing and the production in non-cooperative equilibrium