American Institute of Mathematical Sciences

Advanced
October  2014, 1(4): 579-598. doi: 10.3934/jdg.2014.1.579

Investment under uncertainty, competition and regulation

Adrien Nguyen Huu 1,

1. 

IMPA, Estrada Dona Castorina, 110, Rio De Janeiro, 22460-320, Brazil

Received  September 2013 Revised  February 2014 Published  November 2014

We investigate a randomization procedure undertaken in real option games which can serve as a basic model of regulation in a duopoly model of preemptive investment. We recall the rigorous framework of M. Grasselli, V. Leclère and M. Ludkovsky (Priority Option: the value of being a leader, International Journal of Theoretical and Applied Finance, 16, 2013), and extend it to a random regulator. This model generalizes and unifies the different competitive frameworks proposed in the literature, and creates a new one similar to a Stackelberg leadership. We fully characterize strategic interactions in the several situations following from the parametrization of the regulator. Finally, we study the effect of the coordination game and uncertainty of outcome when agents are risk-averse, providing new intuitions for the standard case.
Keywords: investment, regulation, Cournot competition., Stackelberg competition, preemption game, Real option game.
Mathematics Subject Classification: Primary: 91B06, 91A55; Secondary: 91A8.
Citation: Adrien Nguyen Huu. Investment under uncertainty, competition and regulation. Journal of Dynamics & Games, 2014, 1 (4) : 579-598. doi: 10.3934/jdg.2014.1.579
References:
[1]

A. F. Azevedo and D. A. Paxson, Real options game models: A review, Real Options 2010, 2010. Google Scholar

[2]

F. Black and M. Scholes, The pricing of options and corporate liabilities, The journal of political economy, 81 (1973), 637-654. doi: 10.1086/260062.  Google Scholar

[3]

A. Bensoussan, J. D. Diltz and S. Hoe, Real options games in complete and incomplete markets with several decision makers, SIAM Journal on Financial Mathematics, 1 (2010), 666-728. doi: 10.1137/090768060.  Google Scholar

[4]

D. Becherer, Rational hedging and valuation of integrated risks under constant absolute risk aversion, Insurance: Mathematics and economics, 33 (2003), 1-28. doi: 10.1016/S0167-6687(03)00140-9.  Google Scholar

[5]

B. Chevalier-Roignant, C. M. Flath, A. Huchzermeier and L. Trigeorgis, Strategic investment under uncertainty: A synthesis, European Journal of Operational Research, 215 (2011), 639-650. doi: 10.1016/j.ejor.2011.05.038.  Google Scholar

[6]

D. Fudenberg and J. Tirole, Preemption and rent equalization in the adoption of new technology, The Review of Economic Studies, 52 (1985), 383-401. doi: 10.2307/2297660.  Google Scholar

[7]

M. Grasselli, V. Leclere and M. Ludkovski, Priority Option: The Value of Being a Leader, International Journal of Theoretical and Applied Finance, 16 (2013), 1350004, 37pp. doi: 10.1142/S0219024913500040.  Google Scholar

[8]

S. R. Grenadier, The strategic exercise of options: Development cascades and overbuilding in real estate markets, The Journal of Finance, 51 (1996), 1653-1679. doi: 10.2307/2329533.  Google Scholar

[9]

S. R. Grenadier, Option exercise games: The intersection of real options and game theory, Journal of Applied Corporate Finance, 13 (2000), 99-107. doi: 10.1111/j.1745-6622.2000.tb00057.x.  Google Scholar

[10]

C.-f. Huang and L. Lode, Entry and exit: Subgame perfect equilibria in continuous-time stopping games, working paper, 1991. Google Scholar

[11]

D. Paxson and H. Pinto, Rivalry under price and quantity uncertainty, Review of Financial Economics, 14 (2005), 209-224. doi: 10.1016/j.rfe.2005.04.002.  Google Scholar

[12]

F. Smets, Essays on Foreign Direct Investment, Ph.D. Thesis, Yale University, 1993. Google Scholar

[13]

A. Tsekrekos, The effect of first-mover's advantages on the strategic exercise of real option, in Real R&D Options (eds. D. Paxson), Butterworth-Heinemann, (2003), 185-207. doi: 10.1016/B978-075065332-9.50011-2.  Google Scholar

[14]

J. J. Thijssen, Preemption in a real option game with a first mover advantage and player-specific uncertainty, Journal of Economic Theory, 145 (2010), 2448-2462. doi: 10.1016/j.jet.2010.10.002.  Google Scholar

[15]

J. J. Thijssen, K. J. Huisman and P. M. Kort, Symmetric equilibrium strategies in game theoretic real option models, Journal of Mathematical Economics, 48 (2012), 219-225. doi: 10.1016/j.jmateco.2012.05.004.  Google Scholar

[16]

H. Weeds, Strategic delay in a real options model of R&D competition, The Review of Economic Studies, 69 (2002), 729-747. doi: 10.1111/1467-937X.t01-1-00029.  Google Scholar

show all references

References:
[1]

A. F. Azevedo and D. A. Paxson, Real options game models: A review, Real Options 2010, 2010. Google Scholar

[2]

F. Black and M. Scholes, The pricing of options and corporate liabilities, The journal of political economy, 81 (1973), 637-654. doi: 10.1086/260062.  Google Scholar

[3]

A. Bensoussan, J. D. Diltz and S. Hoe, Real options games in complete and incomplete markets with several decision makers, SIAM Journal on Financial Mathematics, 1 (2010), 666-728. doi: 10.1137/090768060.  Google Scholar

[4]

D. Becherer, Rational hedging and valuation of integrated risks under constant absolute risk aversion, Insurance: Mathematics and economics, 33 (2003), 1-28. doi: 10.1016/S0167-6687(03)00140-9.  Google Scholar

[5]

B. Chevalier-Roignant, C. M. Flath, A. Huchzermeier and L. Trigeorgis, Strategic investment under uncertainty: A synthesis, European Journal of Operational Research, 215 (2011), 639-650. doi: 10.1016/j.ejor.2011.05.038.  Google Scholar

[6]

D. Fudenberg and J. Tirole, Preemption and rent equalization in the adoption of new technology, The Review of Economic Studies, 52 (1985), 383-401. doi: 10.2307/2297660.  Google Scholar

[7]

M. Grasselli, V. Leclere and M. Ludkovski, Priority Option: The Value of Being a Leader, International Journal of Theoretical and Applied Finance, 16 (2013), 1350004, 37pp. doi: 10.1142/S0219024913500040.  Google Scholar

[8]

S. R. Grenadier, The strategic exercise of options: Development cascades and overbuilding in real estate markets, The Journal of Finance, 51 (1996), 1653-1679. doi: 10.2307/2329533.  Google Scholar

[9]

S. R. Grenadier, Option exercise games: The intersection of real options and game theory, Journal of Applied Corporate Finance, 13 (2000), 99-107. doi: 10.1111/j.1745-6622.2000.tb00057.x.  Google Scholar

[10]

C.-f. Huang and L. Lode, Entry and exit: Subgame perfect equilibria in continuous-time stopping games, working paper, 1991. Google Scholar

[11]

D. Paxson and H. Pinto, Rivalry under price and quantity uncertainty, Review of Financial Economics, 14 (2005), 209-224. doi: 10.1016/j.rfe.2005.04.002.  Google Scholar

[12]

F. Smets, Essays on Foreign Direct Investment, Ph.D. Thesis, Yale University, 1993. Google Scholar

[13]

A. Tsekrekos, The effect of first-mover's advantages on the strategic exercise of real option, in Real R&D Options (eds. D. Paxson), Butterworth-Heinemann, (2003), 185-207. doi: 10.1016/B978-075065332-9.50011-2.  Google Scholar

[14]

J. J. Thijssen, Preemption in a real option game with a first mover advantage and player-specific uncertainty, Journal of Economic Theory, 145 (2010), 2448-2462. doi: 10.1016/j.jet.2010.10.002.  Google Scholar

[15]

J. J. Thijssen, K. J. Huisman and P. M. Kort, Symmetric equilibrium strategies in game theoretic real option models, Journal of Mathematical Economics, 48 (2012), 219-225. doi: 10.1016/j.jmateco.2012.05.004.  Google Scholar

[16]

H. Weeds, Strategic delay in a real options model of R&D competition, The Review of Economic Studies, 69 (2002), 729-747. doi: 10.1111/1467-937X.t01-1-00029.  Google Scholar

[1]

Nickolas J. Michelacakis. Strategic delegation effects on Cournot and Stackelberg competition. Journal of Dynamics & Games, 2018, 5 (3) : 231-242. doi: 10.3934/jdg.2018015
[2]

Yuwei Shen, Jinxing Xie, Tingting Li. The risk-averse newsvendor game with competition on demand. Journal of Industrial & Management Optimization, 2016, 12 (3) : 931-947. doi: 10.3934/jimo.2016.12.931
[3]

Tao Li, Suresh P. Sethi. A review of dynamic Stackelberg game models. Discrete & Continuous Dynamical Systems - B, 2017, 22 (1) : 125-159. doi: 10.3934/dcdsb.2017007
[4]

Lianju Sun, Ziyou Gao, Yiju Wang. A Stackelberg game management model of the urban public transport. Journal of Industrial & Management Optimization, 2012, 8 (2) : 507-520. doi: 10.3934/jimo.2012.8.507
[5]

Na Song, Yue Xie, Wai-Ki Ching, Tak-Kuen Siu. A real option approach for investment opportunity valuation. Journal of Industrial & Management Optimization, 2017, 13 (3) : 1213-1235. doi: 10.3934/jimo.2016069
[6]

Ali Naimi-Sadigh, S. Kamal Chaharsooghi, Marzieh Mozafari. Optimal pricing and advertising decisions with suppliers' oligopoly competition: Stakelberg-Nash game structures. Journal of Industrial & Management Optimization, 2021, 17 (3) : 1423-1450. doi: 10.3934/jimo.2020028
[7]

Akio Matsumoto, Ferenc Szidarovszky. Stability switching and its directions in cournot duopoly game with three delays. Discrete & Continuous Dynamical Systems - B, 2021  doi: 10.3934/dcdsb.2021069
[8]

Yueyang Zheng, Jingtao Shi. A stackelberg game of backward stochastic differential equations with partial information. Mathematical Control & Related Fields, 2020  doi: 10.3934/mcrf.2020047
[9]

Zhiping Zhou, Xinbao Liu, Jun Pei, Panos M. Pardalos, Hao Cheng. Competition of pricing and service investment between iot-based and traditional manufacturers. Journal of Industrial & Management Optimization, 2018, 14 (3) : 1203-1218. doi: 10.3934/jimo.2018006
[10]

Zhongbao Zhou, Yanfei Bai, Helu Xiao, Xu Chen. A non-zero-sum reinsurance-investment game with delay and asymmetric information. Journal of Industrial & Management Optimization, 2021, 17 (2) : 909-936. doi: 10.3934/jimo.2020004
[11]

Georgios Konstantinidis. A game theoretic analysis of the cops and robber game. Journal of Dynamics & Games, 2014, 1 (4) : 599-619. doi: 10.3934/jdg.2014.1.599
[12]

Giorgio Calcagnini, Edgar J. Sanchez Carrera, Giuseppe Travaglini. Real option value and poverty trap. Journal of Dynamics & Games, 2020, 7 (4) : 317-333. doi: 10.3934/jdg.2020025
[13]

Yeming Dai, Yan Gao, Hongwei Gao, Hongbo Zhu, Lu Li. A real-time pricing scheme considering load uncertainty and price competition in smart grid market. Journal of Industrial & Management Optimization, 2020, 16 (2) : 777-793. doi: 10.3934/jimo.2018178
[14]

Yannick Viossat. Game dynamics and Nash equilibria. Journal of Dynamics & Games, 2014, 1 (3) : 537-553. doi: 10.3934/jdg.2014.1.537
[15]

Jiahua Zhang, Shu-Cherng Fang, Yifan Xu, Ziteng Wang. A cooperative game with envy. Journal of Industrial & Management Optimization, 2017, 13 (4) : 2049-2066. doi: 10.3934/jimo.2017031
[16]

Ying Ji, Shaojian Qu, Fuxing Chen. Environmental game modeling with uncertainties. Discrete & Continuous Dynamical Systems - S, 2019, 12 (4&5) : 989-1003. doi: 10.3934/dcdss.2019067
[17]

René Aïd, Roxana Dumitrescu, Peter Tankov. The entry and exit game in the electricity markets: A mean-field game approach. Journal of Dynamics & Games, 2021  doi: 10.3934/jdg.2021012
[18]

Abbas Ja'afaru Badakaya, Aminu Sulaiman Halliru, Jamilu Adamu. Game value for a pursuit-evasion differential game problem in a Hilbert space. Journal of Dynamics & Games, 2021  doi: 10.3934/jdg.2021019
[19]

David Cantala, Juan Sebastián Pereyra. Endogenous budget constraints in the assignment game. Journal of Dynamics & Games, 2015, 2 (3&4) : 207-225. doi: 10.3934/jdg.2015002
[20]

Zhenbo Wang, Wenxun Xing, Shu-Cherng Fang. Two-person knapsack game. Journal of Industrial & Management Optimization, 2010, 6 (4) : 847-860. doi: 10.3934/jimo.2010.6.847

 Impact Factor: 

Tools

Metrics

  • PDF downloads (79)
  • HTML views (0)
  • Cited by (0)

Other articles
by authors

[Back to Top]

Copyright © 2021 American Institute of Mathematical Sciences