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Symmetric Equilibrium Strategies in Game Theoretic Real Option Models

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JournalJournal of Mathematical Economics
DateE-pub ahead of print - 30 May 2012
DatePublished (current) - Aug 2012
Issue number4
Volume48
Number of pages225
Pages (from-to)219
Early online date30/05/12
Original languageEnglish

Abstract

This paper considers the problem of investment timing under uncertainty in a duopoly
framework. When both firms want to be the first investor a coordination problem
arises. Here, a method is proposed to deal with this coordination problem, involving
the use of symmetric mixed strategies.

The method is based on Fudenberg and Tirole (1985, Review of Economic
Studies), where it was designed within a deterministic framework. This paper extends the applicability of this method to a stochastic environment. The need for this is exemplified by the fact that ever more contributions in multiple firm real option models make unsatisfactory assumptions to solve the coordination problem mentioned
above. Moreover, our approach allows us to show that in many cases it is incorrect to
claim that, in equilibrium, the probability that both firms invest simultaneously while it
is only optimal for one firm to invest, is zero.

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